Which of the Following Actions Best Illustrates Moral Hazard

question 6

Multiple Choice

Which of the following actions best illustrates moral hazard?

• A)Hannah knows she is a reckless driver and so she applies for automobile insurance.
• B)A person is unwilling to buy a stock when she believes its price has an equal change of rising or falling $10.
• C)Morgan dislikes losing $400 more than he likes winning $400.
• D)When you rent a car, you treat it with less care than you would if it were your own.

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Definitions:

Payback

Payback is a capital budgeting metric that measures the time required for an investment to generate cash flows sufficient to recover the initial investment cost.

Mutually Exclusive

Situations, choices, or events that cannot occur or be chosen at the same time; selecting one option excludes the possibility of the other.

WACC

The Weighted Average Cost of Capital (WACC) represents the expected average return rate a company owes its security holders for financing its assets.

NPV

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment, calculated by subtracting the present value of cash outflows from the present value of cash inflows over a period of time.