Risk Premiums

Related BrainMass Solutions

• How will each of the following affect the supply for insuran

  c. higher premiums (with no change in risk experience) Higher insurance premiums will cause the supply to increase, because the demand will typically decrease.

• Objective risk

  Expected losses are a starting point for calculating premiums. If objective risk is small, premiums will cover losses; but if objective risk is large, premiums may not cover losses and "underwriting loss" may occur.

• Risk aversion and stocks' prices and earned rates of return

  on bonds, and (c) the implications of this for the use of historical risk premiums when applying the SML equation.

• Multifactor Models

  are the risk premiums for each factor in the model?

• Companies using descriptive statistics and probability distributions

  Insurance premiums are fixed such that the expected value of risk is equal to the premium paid (including the normal profits for the firm). The descriptive stats and the probability distribution helps establishing the premiums.

• Which type of life insurance charges higher premiums?

  We would expect them to charge higher premiums than life insurance companies to compensate them for their added risk. This solution predicts which of two types of life insurance will charge higher premiums and explains why.

• stock sensitive to changes in risk premiums & growth expectations

  The expert examines stock sensitive to changes in risk premiums and growth expectations. A situational stock is analyzed.

• Stock Model

  premium on B1 is equal to 0.0649 = 6.49% The risk premium on B2 is equal to 0.0564 = 5.64% This solution finds the risk premiums for factors in a stock two-factor model.

• Calculating Interest Rates

  Assume that the real risk free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short term securities to a level of .2% for 1-year securities.

• Identify each as being consistent with risk averse, risk ne

  Ignoring the risk levels of investment alternatives 1. Risk averse: Larger premiums for riskier projects is a risk averse activity, which demands a higher risk premium as the project risk increases. 2.