The Assumptions Concerning the Shape of Utility Functions of Investors

question 3

Multiple Choice

The assumptions concerning the shape of utility functions of investors differ between conventional theory and prospect theory. Conventional theory assumes that utility functions are __________, whereas prospect theory assumes that utility functions are __________.

• A) concave and defined in terms of wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth
• B) convex and defined in terms of losses relative to current wealth; s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth
• C) s-shaped (convex to losses and concave to gains) and defined in terms of losses relative to current wealth; concave and defined in terms of wealth
• D) s-shaped (convex to losses and concave to gains) and defined in terms of wealth; concave and defined in terms of losses relative to current wealth
• E) convex and defined in terms of wealth; concave and defined in terms of gains relative to current wealth

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Definitions:

Unprofessional Conduct

Behavior that fails to meet the established standards or ethics expected in a professional setting, often leading to disciplinary action.

Lack Of Dependability

The unreliability or inconsistency of someone or something in fulfilling obligations or producing consistent results.

U.S. Economy

The economic system of the United States, characterized by a mixed economy with both private sector freedom and governmental regulation.