Which of the Following Statements Is False

question 15

Multiple Choice

Which of the following statements is false?

• A) Not all insurable risks have a beta of zero. Some risks, such as hurricanes and earthquakes, create losses of tens of billions of dollars and may be difficult to diversify completely.
• B) When a firm buys insurance, it transfers the risk of the loss to an insurance company. The insurance company charges an upfront premium to take on that risk.
• C) By its very nature, insurance for non-diversifiable hazards is generally a positive beta asset; the insurance payment to the firm tends to be larger when total losses are low and the market portfolio is high.
• D) Because insurance provides cash to the firm to offset losses, it can reduce the firm's need for external capital and thus reduce issuance costs.

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Definitions:

Assumption of Risk

A legal doctrine where an individual knowingly exposes themselves to danger and is considered to have voluntarily assumed the risk of injury.

Adulterated Food

Food products that have been compromised in quality or safety due to the addition of substances or the removal of vital components.

Consequential Damages

These refer to indirect losses that result from a breach of contract, which were foreseeable and a direct consequence of the breach, such as lost profits or revenue.

Nominal Damages

Damages that are recoverable when a legal right is to be vindicated against an invasion that has produced no actual present loss.