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Exam 11: Time and Uncertainty

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Question 31

Multiple Choice

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Because of the problem of adverse selection:

A) low-risk individuals may have a hard time finding insurance worth buying.
B) high-risk individuals may have a hard time finding insurance worth buying.
C) everyone is typically charged a lower premium.
D) individuals who buy insurance often act more recklessly.

E) A) and B)
F) None of the above

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Question 32

Multiple Choice

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Diversification involves:

A) investing all your money in one company.
B) buying only one kind of stock.
C) buying only low-risk bonds.
D) None of these are true.

E) None of the above
F) C) and D)

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Question 33

Multiple Choice

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Which of the following statements about risk is true?

What is the total amount owed on a loan of $100,000 after a year at 5 percent interest?

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.If Kate only cares about the expected value of the outcome and does not care about risk, she should:

If you want to own $1 million when you retire in 45 years, and you can only make one deposit, how much should you put into your retirement fund now given the interest rate is 3 percent?

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.What is the probability of drawing a blue marble in the first game?

How does an insurance policy help mitigate risk?

In order to compare benefits today with future costs, we need to know:

In terms of insurance, which of the following statements is explained by adverse selection?

Insurance works because it:

Compounding is:

Risk pooling:lowers the overall cost of a catastrophe.reduces the likelihood of a catastrophic event.reduces the impact of a catastrophe on each individual in the risk pool.

Risk aversion:

The process of accumulation that occurs when interest is paid on previously earned interest is called:

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.The probability of drawing a red marble is:

Which of the following is closest to the future value of a $40,000 deposit earning 3 percent interest annually after 5 years?

Evaluating risk requires us to:

A risk-seeker is likely to:

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, $20 is won, and if it is blue, $1 is won. 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; $20 is won if it is red, $5 is won if it is blue, and $1 is won if it is green. Both games cost $5 to play.What is the expected value of the payoff in the first game?