QUESTION 1 The two big problems facing insurance companies in trying to manage risk are:risk pooling and diversification.risk pooling and adverse...

QUESTION 1

1. The two big problems facing insurance companies in trying to manage risk are:
2. A.risk pooling and diversification.
3. B.risk pooling and adverse selection.
4. C.adverse selection and moral hazard.
5. D.moral hazard and diversification.

12 points  

QUESTION 2

1. In general, people are willing to pay more than the expected value of insurance because:
2. A.they are risk-averse enough to want protection against very large expenses.
3. B.the extra amount represents the value of having peace of mind about such occurrences happening.
4. C.there is utility gained from having the confidence that, if faced with enormous expenses as a result of risk, they will not lose their home or go bankrupt.
5. D.All of these statements are true.

12 points  

QUESTION 3

1. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it—1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it—1 red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue, they win $5; and if it is green, they win $1. Both games cost $5 to play. If Jack only cares about expected value, and not risk, he should decide to play a game if:
2. A.the expected value of the payoff is higher than the price to play the game.
3. B.the expected value of the payoff is lower than the price to play the game.
4. C.the expected value of the payoff is higher than the expected value of the payoff in the other game.
5. D.the expected value of the payoff is double the price to play the game.

12 points  

QUESTION 4

1. Risk pooling:
2. A.reallocates the likelihood of catastrophes happening.
3. B.reallocates the costs of catastrophes when they occur.
4. C.diversifies the risk of catastrophes occurring.
5. D.gathers individuals with similar risks in their life and pools them together.

12 points  

QUESTION 5

1. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it—1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it—1 red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue, they win $5; and if it is green, they win $1. Both games cost $5 to play. What is the expected value of the payoff in the first game?
2. A.$5.75
3. B.$5.00
4. C.$4.75
5. D.$4.50

12 points  

QUESTION 6

1. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it—1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it—1 red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue, they win $5; and if it is green, they win $1. Both games cost $5 to play. Jack is considering whether to play the first game. If Jack only cares about the expected value of the outcome and does not care about risk, he should:
2. A.play the game since it costs $5, and the expected payoff is $5.75.
3. B.not play the game, since it costs $5 and the expected payoff is $5.75.
4. C.play the game since it costs $5.75 and the expected payoff is $5.
5. D.not play the game since it costs $5.75 and the expected payoff is $5.

12 points  

QUESTION 7

1. Suppose Jack and Kate are at the town fair and are choosing which game to play. The first game has a bag with four marbles in it—1 red marble and 3 blue ones. The player draws one marble from the bag; if it is red, they win $20 and if it is blue, they win $1. The second game has a bag with 10 marbles in it—1 red, 4 blue, and 5 green. The player draws one marble from the bag; if it is red, they win $20; if it is blue, they win $5; and if it is green, they win $1. Both games cost $5 to play. Kate is considering whether to play the second game. If Kate only cares about the expected value of the outcome and does not care about risk, she should:
2. A.not play since she never wins anything.
3. B.play if the cost of playing the game is greater than the expected value of the payoff.
4. C.compare the cost of playing the game with the value of her time.
5. D.play if the cost of playing the game is less than the expected value of the payoff.

12 points  

QUESTION 8

1. Insurance premiums represent:
2. A.the expected value of the payout the company will give to individuals who are insured.
3. B.more than the expected value of the payout the company will give to individuals who are insured.
4. C.less than the expected value of the payout the company will give to individuals who are insured.
5. D.peace of mind and are unrelated to the expected value of the payout the company will give to individuals who are insured.

12 points  

QUESTION 9

1. Insurance:
2. A.reduces the risks inherent in life.
3. B.helps individuals avoid certain types of risk.
4. C.makes the future more predictable for individuals.
5. D.None of these statements is true.

12 points  

QUESTION 10

1. The key to diversification is that the risks should be:
2. A.positively correlated.
3. B.uncorrelated.
4. C.negatively correlated.
5. D.easy to reduce.

12 points