Explain why the variance of an investment is a useful measure of the risk associated with it
What will be an ideal response?
The variance provides a measure of the spread of the probability distribution around the expected value of the investment. That is, if the variance is relatively small, the expected value is more likely to be the actual value. If the variance is relatively large, the expected value is less likely to be the actual value. Since something that is more uncertain is said to be more risky, and something with a higher variance is more uncertain, the variance measures risk.
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Country A can produce 50 units of beer or 80 units of pizzas. Country B can produce 100 units of beer or 100 units of pizzas. Which of the following statements is true?
A. Country B has an absolute advantage in both products. B. Country A has a comparative advantage in pizza and country B has a comparative advantage in beer. C. Country B has a comparative advantage in pizza and country A has a comparative advantage in beer. D. A and B.
The bonus of a plant manager in a vertically integrated firm is based on the following formula:
Bonus = 10,000 - 0.5(Qf - Q) where Qf is feasible production and Q is actual production. The value for Qf is provided by the plant manager at the beginning of the year. With this scheme, the plant manager has an incentive: A) to underestimate Qf. B) to overestimate Qf. C) to reveal the true Qf and make Q as small as possible. D) to reveal the true Qf and make Q as large as possible.