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Independence Of Risks And Insurance

Chapter 11
1. Why does the assumption of independence of risks matter in the example of insurance? What would happen to premiums if the probabilities of house burning were positively correlated?

14. Small firms can discover the abilities of their workers more quickly than large ones because they can observe the workers more closely at a variety of tasks. Does it then make sense for people with high abilities to go to small firms? Give some reasons why and some reasons why not.

Chapter 12
4. In some ways monitoring is easier in a partnership than a corporation, where shareholders monitor directors. In what ways is monitoring easier? In what ways is it not?

11. A friend convinces you that she has a great idea for business, and the two of you incorporate. You supply her with funds and let her make all of the executive decisions. Under the agreement you hold 30 percent of the firm's stock and your friend holds 70 percent. Why should you ever put yourself into a position where your friend's decision will carry the day, whether you agree with her or not? What does this tell you about problems that allegedly stem from separation of ownership and control?


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Chapter 11
Independence Of Risks And Insurance:

An indemnified risk is a risk which an insurer has the obligation of paying. An assumption of the independence of risk matter within an insurance example since it is normally considered appropriate to pass some risks associated to the insurance to the re-insurer with an aim of reducing the rate of risk exposure of the insurer. Most insurance programs have risk programs which has a goal of ensuring that the existing level of risk exposure to scenario such as losses is reduced. An existing sense of security after the basic needs is what an individual requires with an aim of ensuring that all needs are satisfied. The loss of economic security is an expected outcome in the cases of economic risk (Anderson & Brown, 2005).

Life is known to be full of uncertainties. In cases where losses occur and premiums have to be paid, accessing the various relationships in existence has to be taken into consideration before premiums are provided. In cases where the probabilities of houses are positively correlated risk pooling mechanism is normally employed with an aim of reducing the cost of the premium offered since the risk will also be reduced. In case where an individual suffers a loss, all are considered to suffer from the same loss. This therefore means that investors will require a risk premium since the total ...

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This solution provides a detailed discussion of the given finance problems.