Question

1) Consider an insurer covering many business in its state but no out-of-state customers. For which of the following exposures would the large portfolio of insured businesses likely generate the weakest risk-reducing diversification benefits?

a. Property damage from hurricanes

b. Employee discrimination lawsuit

c. Customer injury lawsuit

d. Property damage from equipment explosion

e. Automobile damage from collision

2) Under what circumstance is it likely important for a firm to avoid use of its WACC in discounting a project's cash flows?

a. The project has positive initial cash flows

b. The project will last perpetually

c. None of the other answers is correct- a firm always should use its WACC to discount project cash flow

d. The project's cash flow have less dependence on the overall economy than does the rest of the firm

e. The project has negative initial cash flows

Answer 1

Question 1)

As all the businesses insured are in one state only so the property damage from the hurricane is the weakest risk reducing diversification benefits.

Hence, Option A is the answer.

Question 2)

None of the answers given above is correct

Hence, Option C is the answer.