Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 10.5, Problem 2CC
Summary Introduction
To discuss: The circumstances where risk can be diversified in a large portfolio of insurance contracts.
Introduction:
Risk refers to the movement or fluctuation in the value of an investment. The movement can either be positive or negative. A positive fluctuation in the price benefits the investor. The investor will lose money if the price movement in negative.
Diversification refers to the process of investing in multiple investment avenues. The principle of diversification states that the risk or the portfolio reduces to some extent if the investor spreads his or her investment across different assets.
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Chapter 10 Solutions
Corporate Finance
Ch. 10.1 - Prob. 1CCCh. 10.1 - Prob. 2CCCh. 10.2 - Prob. 1CCCh. 10.2 - Prob. 2CCCh. 10.3 - How do we estimate the average annual return of an...Ch. 10.3 - Prob. 2CCCh. 10.4 - Prob. 1CCCh. 10.4 - Do expected returns of well-diversified large...Ch. 10.4 - Do expected returns for Individual stocks appear...Ch. 10.5 - What is the difference between common risk and...
Ch. 10.5 - Prob. 2CCCh. 10.6 - Explain why the risk premium of diversifiable risk...Ch. 10.6 - Why is the risk premium of a security determined...Ch. 10.7 - What is the market portfolio?Ch. 10.7 - Define the beta of a security.Ch. 10.8 - Prob. 1CCCh. 10.8 - Prob. 2CCCh. 10 - Prob. 1PCh. 10 - Prob. 2PCh. 10 - Prob. 3PCh. 10 - Prob. 4PCh. 10 - Prob. 5PCh. 10 - Prob. 6PCh. 10 - The last four years of returns for a stock are as...Ch. 10 - Prob. 8PCh. 10 - Prob. 9PCh. 10 - Prob. 10PCh. 10 - Prob. 11PCh. 10 - How does the relationship between the average...Ch. 10 - Consider two local banks. Bank A has 100 loans...Ch. 10 - Prob. 21PCh. 10 - Prob. 22PCh. 10 - Consider an economy with two types of firms, S and...Ch. 10 - Prob. 24PCh. 10 - Explain why the risk premium of a stock does not...Ch. 10 - Prob. 26PCh. 10 - Prob. 27PCh. 10 - What is an efficient portfolio?Ch. 10 - What does the beta of a stock measure?Ch. 10 - Prob. 31PCh. 10 - Prob. 32PCh. 10 - Prob. 33PCh. 10 - Suppose the risk-free interest rate is 4%. a. i....Ch. 10 - Prob. 35PCh. 10 - Prob. 36PCh. 10 - Suppose the market risk premium is 6.5% and the...Ch. 10 - Prob. 38P
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- Explain Risk Premiums, Interest Rate Risk, and Default Risk?arrow_forwardWhat is the relation between the expected rate of return and the required rate of return as they pertain to the fair market price and the current market price of a security?arrow_forwardWhat is the fair value option? Briefly describe the controversyof applying the fair value option to financial liabilities.arrow_forward
- Hedgers can enter into an insurance policy, also known as a financial contract, also known as a derivative, also known as a put option to mitigate risk. O True O Falsearrow_forwardIf the renewal of the policy was at the discretion of the insurer, would you expect the premiums to be higher or lower?arrow_forwardChoose the best answer. 1.Which statement is TRUE about an insurance contract? * a.The insurer is the party that has an obligation under an insurance contract to compensate a policyholder if an insured event occurs. b.The policyholder is the party that has a right to compensation under an insurance contract if an insured event occurs. c.The insured event is an uncertain future event that is covered by an insurance contract and creates insurance risk. d.All of these statements are true about an insurance contract. 2. IFRS 17 provides that insurance contracts should * a.Comply with all existing IFRS b.Generally continue to be subject to existing accounting policies. c.Comply with the IFRS Framework document. d.Be covered by IAS 32 and IFRS 9 3.An insurance contract can contain both deposit and insurance elements. An example might be a reinsurance contract where the cedant receives a repayment of the premiums at a future date if there are no claims under the contract. Effectively this…arrow_forward
- The maximum rate of return needed to induce an investor to purchase or hold a security is referred to as the investor's required rate of return. OTRUE. FALSEarrow_forwardwhat are the pros and cons of being insured by a mutual insurance company vs a stock insurance company?arrow_forwardImmunization is intended to protect a portfolio against interest rate risk. What should be done? How does it work?arrow_forward
- How does interest rate risk differ from reinvestment rate risk? Why is the difference important?arrow_forward2. A. Define interest rate risk and reinvestment risk. B. Why do banks and life insurance companies/pension funds have different investment strategies and different tolerances to interest rate risk and reinvestment risk?arrow_forwardThe _______________ problem is when customers who are most likely to have a claim against an insurance company are those quickest to apply for an insurance contract. Group of answer choices a. Capital adequacy b. Default risk c. Adverse selection d. Mismatched maturityarrow_forward
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