Asked by Celina Singh on Apr 26, 2024
Verified
In an efficient allocation of risk:
A) all risk is eliminated.
B) those who are most willing to bear risk,bear it.
C) all risk is diversified.
D) all insurance premiums are equal to the expected value of the claims.
Efficient Allocation
The distribution of resources in such a manner that it's impossible to improve anyone's condition without worsening someone else's.
Risk Diversified
The strategy of spreading investments across various assets to reduce exposure to risk in any single area.
- Describe efficient allocation of risk and the principles of diversification and pooling in reducing risk.
Verified Answer
JR
Jenny RabangApr 28, 2024
Final Answer :
B
Explanation :
In an efficient allocation of risk, those who are most willing to bear risk should bear it. This leads to the greatest overall satisfaction and minimizes the costs associated with transferring risk, such as insurance premiums. Eliminating all risk or diversifying all risk may not be practical or efficient, and insurance premiums may not always be equal to the expected value of claims as factors such as administrative costs and profit margin also play a role.
Learning Objectives
- Describe efficient allocation of risk and the principles of diversification and pooling in reducing risk.
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