Uncertainty

22) What is one reason car insurance seems much cheaper than health insurance?

C) Health insurance entails more systematic than idiosyncratic risk, and therefore there are fewer gains to diversification.

13) A stock mutual fund's primary advantage is to allow

C) investors to diversify away idiosyncratic risk

24) You purchased two stocks that are perfectly negatively correlated.

B) Even though you diversified the idiosyncratic risk away, your portfolio is still affected by systemic risks like a stock market crash.

23) When insurance companies offer fair insurance,

A) risk-averse agents always purchase it.

17) What is one reason the federal government might "bail out" farmers in flood prone areas of the country?

A) Such flooding is not diversifiable and therefore only non-profit entities, such as the federal government, can cover the risks.

1 4) After Hurricane Katrina, there was considerable public outrage that many of the properties were not insured against flooding although they were insured against wind damage. What might explain these different approaches to insurance?

A) The risk of wind damage is potentially diversifiable, but the risk of flooding is not.

15) Farmers who purchase insurance against crop failures tend to be pooled with farmers far away. Why might this be the case?

A) The weather in a single geographic area represents idiosyncratic risk, which is

11) Insurance companies do NOT cover losses that would

A) happen to all of the policyholders at once.

21) One reason health insurance is very expensive is because

A) it is likely a nearly fair insurance policy.

12) A stock mutual fund is generally

A) less risky than buying individual stocks.

25) Fair insurance is a contract between an insurer and a policyholder in which.

B) the value of the contract to the policyholder is zero.

20) Suppose a senior college football player approaches an insurance company and seeks to purchase an insurance policy against him receiving a career-ending injury. The insurance company

B) will sell him an insurance policy because the proposal entails risk not uncertainty.

16) If global warming began to cause random world-wide damage to crops, insurance companies

B) would not insure against specific crop failures.

19) Suppose a blackjack gambler approaches an insurance company and seeks to purchase an insurance policy that his next trip to Reno, NV will not net $10,000. The insurance company

C) will not sell her an insurance policy because the proposal entails uncertainty not risk.