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# PRMIA Exam 8006 Topic 1 Question 5 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam
Question #: 5
Topic #: 1
[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]

Given identical prices, a bond trader prefers dealing with Bank A over Bank B. Given a choice between Bank B and Bank C, he prefers Bank B. Yet, when given a choice between Bank A and Bank C, he prefers dealing with Bank C. What axiom underlying the utility theory is he violating?

Remember the four basic axioms underlying the principal of maximum expected utility:

- Transitivity, ie if A is preferred over B, and B is preferred over C, then A must be preferred over C;

- Continuity, ie if A is preferred over B, and B is preferred over C, then B is on a continuum between A and C such that we can be indifferent between receiving B, or a lottery offering either A or C with probabilities p & 1-p respectively.

- Independence, ie choices are not affected by the way they are presented

- Stochastic dominance, ie a gamble that offers a greater probability of a preferred out come will be preferred.

In this case, the first axiom is being violated. Therefore Choice 'c' is the correct answer.