Use the Information for the Question(s)below

question 10

Multiple Choice

Use the information for the question(s) below.
Your firm faces a 6% chance of a potential loss of $45 million next year. If your firm implements new safety policies, it can reduce the chance of this loss to 3%, but the new safety policies have an upfront cost of $350 000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-Insurance for large risks that cannot be well diversified has a(n) ________, which increases its cost.

• A)negative beta
• B)moral hazard clause
• C)actuarially biased risk
• D)positive beta

---

Definitions:

Age Of Viability

The age at which a premature baby is capable of surviving outside the womb with medical support, typically around 24 weeks of gestation.

Germinal Period

The initial two weeks of prenatal development following conception, characterized by rapid cell division and the beginning of cell differentiation.

Placenta

An organ that develops in the uterus during pregnancy, providing oxygen and nutrients to the growing baby while removing waste.

Implantation

The process by which a fertilized egg attaches itself to the wall of the uterus, beginning the stages of pregnancy.