Risk, uncertainty and information

Question 1

Attitudes to risk

Answer 1

Risk neutral:
Risk-averse:
Risk-lover.

Question 2

Risk-neutral

Answer 2

only interested in whether the odds will yield a profit on average

Question 3

Risk-averse

Answer 3

will refuse a fair gamble

Question 4

Risk-lover

Answer 4

will bet even when a strict mathematical calculation reveals that the odds are unfavourable

Question 5

Risk-pooling

Answer 5

Works by aggregating independent risks to make the aggregate more certain.

Question 6

Risk-sharing

Answer 6

works by reducing the stake

Question 7

Name the 2 factors relevant to portfolio selection

Answer 7

Diversification - a strategy of reducing risk by risk-pooling across several assets whose individual returns behave differently from one another.
Beta - measurement of the extent to which a particular share’s return moves with the return of the whole stock market.

Question 8

A spot market

Answer 8

Deals in contracts for immediate delivery and payment

Question 9

A forward market

Answer 9

Deals in contracts made today for delivery of goods at a specified future date at a price agreed today

Question 10

Hedging

Answer 10

The use of forward markets to shift risk onto somebody else

Question 11

A speculator

Answer 11

Temporarily holds an asset in the hope of making a capital gain