AGEC 325 Final Exam Questions and
Answers Graded A+
Ability to Bear Risk - Correct answer--Financial reserves play a big part in
determining an operation's risk bearing ability
-farms with a large amount of capital can withstand larger losses before becoming
insolvent
-cash flow commitments also affect the ability to repay loans
Willingness to Bear Risk - Correct answer-- some producers avoid risks even
though they have no debt and a strong cash flow
- factors affecting willingness include; Age, equity, financial commitment, past
financial experiences, the size of potential gains or losses
Decision makers tend to prefer ______ variability to ______ variability - Correct
answer-Low; High
Probabilities: - Correct answer-- help us form expectation
- the true probabilities are seldom known
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,-subjective probabilities formed by available information, managers experience,
and personal judgement
Decision making under risk - Correct answer-1. Identify possible sources of risk
(weather)
2. Identify possible outcomes that can occur
3. List the strategies available (how many steers?)
4. Quantify the consequences or results of each possible outcome
5. Estimate the risk and expected returns for each strategy
Decision tree - Correct answer-Diagram that traces several possible management
strategies, the potential outcomes from an event and their results
Payoff matrix - Correct answer-Contains the same information as a decision tree
but organized in the form of a table
What are the four decision rules - Correct answer-1. Maximum expected value
2. Risk and Returns Comparison
3. Most likely outcome
4. Safety First
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,Maximum expected value - Correct answer-choose the strategy with the highest
expected return
Risk & Returns comparison - Correct answer-eliminate options with both a lower
expected return and higher risk
Most likely outcome - Correct answer-Choose the strategy with the highest
expected return in the most likely scenario "average"
What are the 5 general sources of risk? - Correct answer-1. Production Risk
2. Price and Market Risk
3. Financial Risk
4. Legal Risk
5. Personal Risk
Production Risk and how to manage it - Correct answer-Production Risk is the
biological processes that could be affect by
- weather
- diseases
- insects
- weeds
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, - metabolism
- genetics
You can manage this by...
- choosing enterprises with stable incomes
- enterprise diversification
insurance
- extra production capacity for years when weather impacts timeline of planting or
harvesting
- custom farming; provide specific operations for a farmer at a fixed rate
- long term contract with supplier reduces risk of now having needed input
Price and market risk and how to manage it - Correct answer-- ag prices are
determined by global supply and demand
- which are affected by global weather, policies, incomes, consumer preferences,
exchange rates, etc
- market prices can also be risky
- processor may shut down
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
Answers Graded A+
Ability to Bear Risk - Correct answer--Financial reserves play a big part in
determining an operation's risk bearing ability
-farms with a large amount of capital can withstand larger losses before becoming
insolvent
-cash flow commitments also affect the ability to repay loans
Willingness to Bear Risk - Correct answer-- some producers avoid risks even
though they have no debt and a strong cash flow
- factors affecting willingness include; Age, equity, financial commitment, past
financial experiences, the size of potential gains or losses
Decision makers tend to prefer ______ variability to ______ variability - Correct
answer-Low; High
Probabilities: - Correct answer-- help us form expectation
- the true probabilities are seldom known
©COPYRIGHT 2025, ALL RIGHTS RESERVED 1
,-subjective probabilities formed by available information, managers experience,
and personal judgement
Decision making under risk - Correct answer-1. Identify possible sources of risk
(weather)
2. Identify possible outcomes that can occur
3. List the strategies available (how many steers?)
4. Quantify the consequences or results of each possible outcome
5. Estimate the risk and expected returns for each strategy
Decision tree - Correct answer-Diagram that traces several possible management
strategies, the potential outcomes from an event and their results
Payoff matrix - Correct answer-Contains the same information as a decision tree
but organized in the form of a table
What are the four decision rules - Correct answer-1. Maximum expected value
2. Risk and Returns Comparison
3. Most likely outcome
4. Safety First
©COPYRIGHT 2025, ALL RIGHTS RESERVED 2
,Maximum expected value - Correct answer-choose the strategy with the highest
expected return
Risk & Returns comparison - Correct answer-eliminate options with both a lower
expected return and higher risk
Most likely outcome - Correct answer-Choose the strategy with the highest
expected return in the most likely scenario "average"
What are the 5 general sources of risk? - Correct answer-1. Production Risk
2. Price and Market Risk
3. Financial Risk
4. Legal Risk
5. Personal Risk
Production Risk and how to manage it - Correct answer-Production Risk is the
biological processes that could be affect by
- weather
- diseases
- insects
- weeds
©COPYRIGHT 2025, ALL RIGHTS RESERVED 3
, - metabolism
- genetics
You can manage this by...
- choosing enterprises with stable incomes
- enterprise diversification
insurance
- extra production capacity for years when weather impacts timeline of planting or
harvesting
- custom farming; provide specific operations for a farmer at a fixed rate
- long term contract with supplier reduces risk of now having needed input
Price and market risk and how to manage it - Correct answer-- ag prices are
determined by global supply and demand
- which are affected by global weather, policies, incomes, consumer preferences,
exchange rates, etc
- market prices can also be risky
- processor may shut down
©COPYRIGHT 2025, ALL RIGHTS RESERVED 4
