1. The "Too big to Fail" policy has created the possibility of a moral hazard for large banks. The cause of this moral hazard is related to:

a. The incentive to assume high risk without taking the full implications of the risk taking

b. The presence of deposit insurance guarantee from the federal government

c. the back of market discipline for holders of bank securities when the bank is engineered in high risk taking behavior

d. all of the above

2. What is the expected return on an equally weighted portfolio of these three stocks? state of economy Boom Bust Probability of state of economy 0.64 0.36 rate of return if state occurs Stock A 0.19 .15 Stock B 0.13 0.11 Stock C 0.31 0.17.

A) 19.67 percent

B) 18.60 percent

C) 20.48 percent

D) 16.33 percent

E) 21.33 percent