Expected Utility Theory in Finance
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Questions and Answers

What is one of the causes of agency problems?

  • The agent never receiving any bonuses
  • The principal not communicating with the agent
  • The principal always agreeing with the agent's decisions
  • The agent acting independently from the principal for personal gain (correct)

    • How can transparency help reduce agency problems?

  • By keeping transactions confidential between the agent and principal
  • By making the decisions without consulting the principal
  • By allowing the agent to act independently
  • By ensuring decisions are agreed upon by both parties and are fair (correct)

    • What is one way to motivate an agent according to the text?

  • Implementing restrictions on the agent's power
  • Introducing bonuses for the agent (correct)
  • Keeping the agent in the dark about important information
  • Confidentiality breaches regarding the principal's information

    • What might cause a conflict of interest between a principal and an agent?

    <p>The agent acting in their own best interest rather than the principal's</p> Signup and view all the answers

    How can setting specific restrictions on agency power help reduce agency problems?

    <p>By increasing the principal's confidence in their agent</p> Signup and view all the answers

    What action by an agent might lead to a confidentiality breach?

    <p>Engaging in insider trading using principal's information</p> Signup and view all the answers

    How does introducing bonuses affect an agent's decision-making according to the text?

    <p>It motivates agents to make decisions that benefit the principal</p> Signup and view all the answers

    Why might an agent act against the recommendations provided by the principal?

    <p>'The agent wants to obtain previously agreed upon incentives or bonuses'</p> Signup and view all the answers

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