A Mechanism for Reducing Financial Risk and Spreading Financial Loss

question 121

True/False

A mechanism for reducing financial risk and spreading financial loss due to unexpected events is called insurance.​

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Definitions:

Financial Models

Quantitative tools built to represent the performance of a financial asset or portfolio, often used for forecasting and decision making.

Leveraged Firm

A company that uses borrowed capital or debt to fund its operations and investments, aiming to increase potential returns to shareholders.

Risk-Free Rate

The return on investment with no risk of financial loss, typically represented by the yield on government securities.

Market Risk Premium

The extra return investors demand for choosing to invest in the market over a risk-free asset.