The Principal-Agent Problem

question 73

Multiple Choice

The principal-agent problem:

• A) is when the principal has more information than the agent.
• B) is when the agent is tempted to put in more effort than the principal would like.
• C) is commonly seen in the employer-employee relationship.
• D) is when the principal and agent have the same objectives.

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Definitions:

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion of a set of values, commonly used in finance to assess the risk associated with a particular investment.

Correlation

Correlation is a statistical measure that describes the extent to which two variables change together, indicating the strength and direction of their relationship.

Market Risk Premium

The additional return investors expect for holding a risky market portfolio instead of risk-free assets, reflecting the extra risk.

Beta

A measure of a stock's volatility in relation to the overall market; a beta greater than 1 indicates the stock is more volatile than the market, while a beta less than 1 means it is less volatile.