Which of the Following Is an Example of Moral Hazard

question 116

Multiple Choice

Which of the following is an example of moral hazard?

• A) The healthiest people buy life insurance.
• B) The sickest people buy health insurance.
• C) The person with health insurance rides a motorcycle without wearing a helmet.
• D) The person with life insurance exercises daily and eats healthy foods.

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Definitions:

CAPM

The Capital Asset Pricing Model, a theory used to determine the expected return on an investment, factoring in risk and the time value of money.

Risk-free Rate

The return on an investment with zero risk, typically represented by the yield on government securities.

Capital Asset Pricing Model

A model that describes the relationship between systematic risk and expected return for assets, particularly stocks, used in finance to price risky securities.

William Sharpe

An economist who created the Sharpe Ratio, a measure to calculate risk-adjusted return.