Dan, Age 19, May Have Trouble Buying Insurance at a Low

question 38

Multiple Choice

Dan, age 19, may have trouble buying insurance at a low price because

• A) the insurance company has private information that he is a risky driver.
• B) the insurance company has private information that his signals are valid.
• C) insurance companies fear that he has private information that his deductible is too high.
• D) insurance companies fear that he has private information that he is a risky driver.

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Definitions:

Single Index Model

A financial model that describes the return of a stock as a function of the return of a market index, plus a residual unique to the stock.

Actual Return

The real return an investor receives on an investment, factoring in all gains, losses, dividends, and interest.

Risk-Free Rate

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

Evolution of Beta

The changes in Beta over time, reflecting how a security's volatility relative to the market can vary with different market conditions or company developments.