Figure 27-2

question 40

Multiple Choice

Figure 27-2. The figure shows a utility function for Britney.
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• A) if Britney owns a house, she would not consider buying fire insurance.
• B) Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 2 percent to a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent.
• C) Britney would prefer to hold a portfolio of stocks with an average return of 8 percent and a standard deviation of 5 percent to a portfolio of stocks with an average return of 6 percent and a standard deviation of 3 percent.
• D) All of the above are correct.

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Definitions:

Time Inconsistency

is a situation where a person's preferences change over time, such that what they choose today may differ from what they will choose in the future, often leading to decision-making challenges.

Present

The current moment or period in time.

Future

Refers to the time that is yet to come, also used in finance as a contract to buy or sell an asset at a predetermined future date and price.

Time Inconsistency

A situation where a decision-maker's preferences change over time, making plans formulated at one time incompatible or less desirable at a future time.