When a Night Watchman Only Performs Two Walk-Throughs Per Night

question 7

Multiple Choice

When a night watchman only performs two walk-throughs per night when he is being paid to perform five walk-throughs per night, it is an example of

• A)both moral hazard and adverse selection.
• B)neither moral hazard nor adverse selection.
• C)moral hazard, but not adverse selection.
• D)adverse selection, but not moral hazard.

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Definitions:

Greenmail

A strategy where a company buys back its own shares from a potential acquirer at a price higher than the market value to avoid a takeover.

Asset Allocation

The process of spreading investments among different classes of assets, such as stocks, bonds, and cash to manage risk and achieve investment goals.

Portfolio Construction

The process of selecting the appropriate mix of investments and allocating assets among those investments to achieve specific investment goals.

Secondary Market

A market where investors buy and sell securities or assets from other investors, rather than from the issuing company directly.