Problem 2
In which of the following are the risks being pooled: (a) life insurance, (b) insurance against the Thames flooding, (c) insurance for a pop star's voice ?
Problem 3
You see an advert for life insurance for anyone over 45 years old. No medical examination is required. Do you expect the premium rates to be high, low or average ? Why?
Problem 6
Suppose that Philip has a total utility of income given by \(\mathrm{U}(\mathrm{I})=\mathrm{I}\), where \(I\) denotes income. In a graph with utility on the vertical axis and income on the horizontal axis, plot Philip's total utility of income. What is Philip's attitude towards risk? Explain.
Problem 8
We know from many situations that people will pay to avoid risk. Name three risky products that you could choose to buy. In each case, explain the motive.
Problem 9
What kind of information asymmetry do stock markets face which requires that these markets be regulated ?
Problem 10
You set up a firm to advise the unemployed on the best way to use their time to earn money. Your firm issues shares on the stock market. In equilibrium, will your shares be expected to earn a higher or lower return than the stock market average ? Why?
Problem 13
Essay question You run a pension fund and know that in 20 years' time you need to make a lot of payments to people who will then have retired. Should you: (a) invest in bonds that mature in 20 years' time so you know exactly how much you will then have, (b) invest in equities because historically their average return has been greater than bonds in the long run, or (c) begin mainly in equities but switch gradually into bonds as the 20 -year period elapses ?
