There Are Four Lighthouses on the Island of Sand

question 202

Multiple Choice

There are four lighthouses on the island of Sand. If this is the efficient quantity of lighthouses

• A) the marginal social benefit of the fourth lighthouse equals its marginal social cost.
• B) total social benefit is zero.
• C) marginal social benefit minus marginal social cost is a maximum.
• D) Both answers A and C are correct.

Understand the differences in risk tolerance among investors and its impact on portfolio selection.

Recognize the importance of the risk-free asset in portfolio construction and its role.

Understand and apply the concept of the reward-to-volatility ratio.

Comprehend the principles of asset allocation between risky and risk-free assets.

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Definitions:

Pearson Correlation

A measure of the linear correlation between two variables X and Y, giving a value between -1 and 1 which indicates the extent of their linear relationship.

Coefficient

A numerical or constant factor in a mathematical equation that multiplies a variable.

Spearman Rank-Order

An approach that doesn't rely on parameters to gauge the correlation of ranks, examining the extent to which a monotonic function can accurately represent the linkage between two variables.

Nominal Level

The simplest level of measurement that classifies data into distinct categories within which no order or ranking can be inferred.