Joe Pre-Orders a Non-Refundable Movie Ticket

question 12

Multiple Choice

Joe pre-orders a non-refundable movie ticket. He then reads a number of reviews of the movie in question that make him realise that he will not enjoy it. He goes to see it anyway, rationalising that otherwise his money will have been wasted. Is Joe succumbing to the Sunk Cost Fallacy?

• A)No, because going to see the movie means that the product of his initial investment was realised as originally planned.
• B)Yes, since he invested a valuable asset, his time, in a project based on its previous costs.
• C)No, because the cost of the movie was not recoverable and would have been lost whatever action he took.
• D)No, because he incurred no further costs by going to see the movie.

Understand the concept of the risk-reward relationship and how it applies to various investments.

Identify and explain the role of beta in assessing the risk of individual stocks and portfolios.

Explain the impact of changes in expected inflation and the market risk premium on required returns.

Apply the principles of portfolio diversification and understand its effect on risk reduction.

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Definitions:

Financial Risk Management

The practice of protecting economic value in a firm by using financial instruments to manage exposure to risk.

Hedging

Hedging is an investment strategy used to minimize the risk of adverse price movements in an asset, typically by taking an offsetting position in a related security.

Risk Profile

An evaluation of an individual or organization's willingness and ability to take risks, often influencing investment choices.

Troy Ounces

A troy ounce is a unit of imperial measure, commonly used to gauge the weight of precious metals such as gold and silver, where one troy ounce is equivalent to approximately 31.1 grams.