Which of the Following Is True About an Individual's Choice

question 10

Multiple Choice

Which of the following is true about an individual's choice of insurance assuming state-independent tastes?

• A)Full insurance will be chosen from a full menu of actuarily fair insurance if tastes are risk averse.
• B)No insurance will be chosen if the menu of insurance contracts is actuarily unfair and tastes are risk averse.
• C)No insurance will be chosen if the menu of insurance contracts is actuarily unfair and tastes are risk-neutral.
• D)(a) and (b) are true.
• E)(a) and (c) are true.
• F)(b) and (c) are true.
• G)All of the above.
• H)None of the above

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Definitions:

Crossover Rate

The rate of return at which two projects have the same net present value; used in capital budgeting to evaluate the desirability of investments or projects.

WACC

A measure of a firm's blended cost of capital across all sources, including equity and debt.

NPV

Net Present Value is the calculation used to determine the value of future cash flows in today's dollars, subtracting the initial investment.

Multiple IRRs

Situations where a project or investment has more than one internal rate of return, occurring with alternating cash flows (positive and negative).