Exam 16: Uncertainty

People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?

Bob has an initial wealth of $1200 but faces a 50% chance of losing $800 to doctors' bills in the coming year.Insurance is available at a rate of 60¢ per $1 of coverage.This means that if Bob purchases $X in coverage,it costs 6X¢ and pays $X towards Bob's doctors' bills.If Bob's utility function is U(w)= 2 ,how much insurance (X)will Bob purchase?

In terms of the stock market,systematic risk refers to the fact that

16.2 Attitudes Toward Risk -The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.What is the most Bob would pay for insurance that would replace his $100 should it be stolen?

If two events are perfectly positively correlated,then

-The above figure shows Bob's utility function.He currently has $50 and is considering investing all of it in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.Bob will

For the following, please answer "True" or "False" and explain why. -A fair game is a game in which the chances are 50-50 that you win or lose.

Explain why the rate of return from investing in stocks is higher than from investing in bonds.

An individual has an initial wealth of $35,000 and might incur a loss of $10,000 with probability p.Insurance is available that charges $gK to purchase $K of coverage.What value of g will make the insurance actuarially fair? If she is risk averse and insurance is fair,what is the optimal amount of coverage?

Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is

If Ann's utility function is U = W⁰.⁵,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her risk premium to avoid bearing this risk is

If a payout is certain to occur,then the variance of that payout equals

You draw colored balls out of a bag.You draw a red ball 30% of the time and a blue ball 70% of the time.For each draw,the blue outcome and the red outcome are

Lisa runs a local flower shop,if it rains on Valentine's Day and she opens the shop,she will lose $200.If it does not rain on Valentine's Day,she will earn $500 dollars as profits.The chance of rain is 30%,what is Lisa's gain from perfect information about weather conditions on the forthcoming Valentine's Day?

The Arrow-Pratt measure of risk aversion is

Describe how the risk premium for a person with a convex utility function is determined.

All else held constant,as the variance of a payoff increases,the

The rate of return on bonds is lower than on stocks over time because

Searching the Internet for information to help select a product that is more reliable is most likely to be done by a

Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100; otherwise it is worth $0.There is 50% chance that any variety will be retired.What is the value to Sarah of knowing ahead of time whether a variety will be retired?