Chapter Eighteen

Question 0

Ex Ante

Answer 0

Determined before the state of the world is known.

Question 1

State of the world

Answer 1

A potential set of conditions

Question 2

Ex Post

Answer 2

Determined after the state of the world is known.

Question 3

Expected Value

Answer 3

The average value over all states of the world, with each state weighted by its probability.

Question 4

Law of large numbers

Answer 4

When a gamble is repeated many times, the average outcome is the expected value.

Question 5

Riskiness

Answer 5

Variation in potential outcomes.

Question 6

Risk Free

Answer 6

Having the same value in any state of the world.

Question 7

Fair odds

Answer 7

Odds that reflect the true probabilities of various states of the world.

Question 8

Diversify

Answer 8

To reduce risk

Question 9

Risk Neutral

Answer 9

Caring only about expected value.

Question 10

Risk Averse

Answer 10

Always preferring the least risky among baskets with the same expected value.

Question 11

Risk Preferring

Answer 11

Always preferring the most risky among baskets with the same expected value.

Question 12

Uninsurable Risk

Answer 12

A risk that cannot be diversified.

Question 13

Future contract

Answer 13

A contract to deliver a specified good at a specified future date for a specified price.

Question 14

Futures market

Answer 14

The market for futures contracts.

Question 15

Spot Market

Answer 15

The market for goods for immediate delivery.

Question 16

Spot price

Answer 16

Price in the spot market.

Question 17

Speculator

Answer 17

One who attempts to earn profits in the futures market by predicting future changes in supply or demand.

Question 18

Returns

Answer 18

Gains to the holder of a financial asset, including dividends and increases in the asset’s value.

Question 19

Expected return

Answer 19

The expected value of return

Question 20

Standard Deviation

Answer 20

A precise measure of risk.

Question 21

Investors

Answer 21

Buyers of risky assets

Question 22

Portfolios

Answer 22

Combinations of risky assets.

Question 23

Efficient set

Answer 23

The northwest boundary of the set of all portfolios.

Question 24

Efficient portfolio

Answer 24

A portfolio in the efficient set.

Question 25

Capital asset pricing model

Answer 25

A model that assumes that investors care only about expected return and risk, where risk is measured by standard deviation.

Question 26

Market Line

Answer 26

The line through a risk free asset and tangent to the efficient set.

Question 27

Market portfolio

Answer 27

The point of tangency between the market line and the efficient set.

Question 28

Rational Expectations

Answer 28

Expectations that, when held by market participants, lead to behaviour that fulfills those expectations on average.