Adverse Selection Is a Problem Associated with Equity and Debt

question 65

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 percent loss if the borrower defaults.
• C) the borrower's lack of incentive to seek a loan for highly risky investments.
• D) none of the above.