Use the Information for the Question(s) Below

question 31

Multiple Choice

Use the information for the question(s) below.
Your firm faces an 8% chance of a potential loss of $50 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 $250,000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-An operator of an oil well has a 0.5% chance of experiencing a catastrophic failure over the next year. This failure will cost the operator $500 million. If the risk-free rate is 2%, the expected return on the market is 8%, and the beta of the risk is 0, what is the actuarially fair insurance premium?

• A) $2,450,980
• B) $2,500,000
• C) $2,550,000
• D) $2,314,815

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Definitions:

Mezzo-Level

Mezzo-level refers to an intermediate scope or scale, particularly in social work, focusing on small communities, groups, or organizations rather than individuals or larger societal structures.

Social Work Practice

A professional field that focuses on helping individuals, families, groups, and communities to enhance their collective well-being and social functioning.

Procedural Justice

The concept of fairness in the processes that resolve disputes and allocate resources, focusing on the transparency and neutrality of the processes involved.

Welfare of Individuals

The overall health, happiness, and well-being of a person.