Adverse Selection Is a Problem Associated with Equity and Debt

question 30

Multiple Choice

Adverse selection is a problem associated with equity and debt contracts arising from

• A)the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
• B)the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
• C)the borrower's lack of incentive to seek a loan for highly risky investments.
• D)the lender's inability to restrict the borrower from changing his behavior once given a loan.

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Definitions:

Psychosexual Development

Freud's theory of childhood stages of development, each characterized by an erogenous zone that is the source of a child's psychosexual energy.

Sexual Fantasies

Imaginative thoughts or daydreams about sexual activities or desires, which can serve various psychological purposes.

Unconscious

The part of the mind that contains thoughts, memories, and desires not within the realm of current awareness.

Latency Stage

A phase in Freud's psychosexual developmental theory where the sexual drive is dormant, typically occurring from about age six to puberty.