gy is: 12. Based on the efficient market hypothesis, the best investment strate
ID: 1115441 • Letter: G
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gy is: 12. Based on the efficient market hypothesis, the best investment strate (I pt, CHOOSE 1) A) Paying the top hedge fund managers to manage your savings. B) Real estate C) Investing all of your savings in a single asset. D) Investing in a low fee, well-diversified mutual fund. Chapter 24 13. Analyze the situations involving risk below to determine whether they potentially involve a Moral Hazard, Adverse Selection or Principal-Agent problem. For Moral Hazard write "M", in the blank. For Adverse Selection write “A". For Principal-Agent write “P" in the blank. (1 pt. each) Even though it does not enhance student learning or job market prospects university administrators spend university resources to construct high-end sports complexes and pay them selves high wages. ii. As a doctor you are careless because you have high quality malpractice insurance ii. The average price of high-quality used cars is below the average value of high- quality used cars because the market also contains lemons People on a flood plain buy flood insurance Drivers with comprehensive collision insurance drive more recklessly than others Your mechanic tells you that your car needs a new, expensive electrical component in the engine iv. v. vi. .Explanation / Answer
12d) is correct answer.
Investing whole sum of money in Real estate or investing all of the money in single asset covers a huge risk. EHM suggest that the best strategy is to buy and hold a diversified portfolio and to minimise investment cost.
i) M. Moral hazard problem occurs when one party gets involved in a risky event knowing that he is protected by risk insurance.
ii) M
iii) A. Adverse selection is a situation when sellers have information that buyers do not have or vice versa about the aspect of product quality.
iv) A
v) M
vi) p. principal and agent problem in economics is a dilemma when one person take decision on the behalf of other person that impact another person or entity.
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