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Discuss the profits are reward for risks and uncertainty-bearing.
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- What term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk managementDoes the risk correspond to the dispersion, or uncertainty, impossible outcomes?A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. What is the consumer's expected wealth one year from now? b. An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? c. Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the above described uncertain situation. What is the maximum premium that the insurance company will be able to charge this consumer for its full insurance policy?
- You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain. a) What is the expected value of your earnings from investing in Ford stock? b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?Discuss the different categories of risk that businesses may face and elaborate on the risk facedRisk can be defined as the effects of uncertainty on objectives and often manifests itself in risk to property and ownership, operations and ….. of funds. A) flow B) outflow