Which of the Following Represent Examples of Adverse Selection

question 33

Multiple Choice

Which of the following represent examples of adverse selection?

• A) Unhealthy people are more likely to want health insurance.
• B) Careless drivers purchasing extra auto insurance.
• C) Risk averse individuals choosing to buy extra insurance.
• D) all of the above
• E) A and B only

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Definitions:

Cumulative Nonparticipating Preferred Stock

Preferred stock that accumulates unpaid dividends, which must be paid out before dividends can be distributed to common stockholders, but does not participate beyond the fixed dividend.

Cash Dividends

A redistributive payment of a portion of a company's earnings, made in cash, to its shareholders.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, equal to the share capital plus retained earnings.

Premium

An additional amount over the normal cost, or the portion of insurance payments above the cost of the insured risk.