Adverse Selection Is Created by

question 152

Multiple Choice

Adverse selection is created by

• A) incentives to change behavior after two parties have reached an agreement.
• B) risk.
• C) lump-sum taxes.
• D) private information.

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Definitions:

APT

Abbreviation for Arbitrage Pricing Theory, a multifactor financial model that describes the relationship between the return of a portfolio and the return of a single asset through a linear combination of macroeconomic factors.

CAPM

A model identifying the connection between the expected returns of assets, primarily shares, and their associated systematic risk, known as the Capital Asset Pricing Model.

Systematic Risk Factors

Market risks that affect the overall market and cannot be eliminated through diversification, such as interest rates, inflation, and economic cycles.

Equally-Weighted Portfolio

An investment portfolio where each asset is allocated the same proportion of the total investment.