The Manager's Utility Function for Profit Is U $\pi$ )= 50 $\pi$

question 12

Multiple Choice

The manager's utility function for profit is U $\pi$ ) = 50 $\pi$ ,where $\pi$ is the dollar amount of profit.The manager is considering a risky decision with the four possible profit outcomes shown below.The manager makes the following subjective assessments about the probability of each profit outcome: The marginal utility of an extra dollar of profit is __________.

• A)0.20
• B)0.30
• C)1.0
• D)10
• E)none of the above

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Definitions:

Firm's Beta

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

Single-Factor Market Model

A financial model that explains a security's returns as the outcome of a single market-wide factor and the security's sensitivity to that factor.

Unsystematic Risk

The risk associated with a specific company or industry that can be mitigated through diversification.

Residuals

Residuals are differences between observed and predicted values in statistical models, used to assess the fit of models to data.