Suppose that an insurance policy costs 4% of an asset’s value while the true probability of...
- Suppose that an insurance policy costs 4% of an asset’s value
while the true probability of a total loss is 3%.
- What does this say about the risk preferences of policy holders (i.e., of folks who purchase the policy)?
- Suppose that a potential policy holder is only willing to pay a premium if it is 3%. What does this say about their risk preference?
Homework Answers
a. The policy holders in this case are risk
averse as they reluctant to take any risk (by paying more
cost).
b. The policy holders in this case are risk
nuetral as they are just paying enough money as the
costs.
Please do rate me and mention doubts, if any, in the comments section.
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