1.     Insufficient information to compute Consider three investors in Stock A:

Mr. Single invests for 1 year

Ms Double invests for 2 years

Mrs. Triple invests for 3 years

Which of the following statements are true? (Hint: Recall what the basic stock valuation principle is.)

a.     Mrs. Triple would place the highest value on Stock A because she is investing for the longest time.

b.    Ms. Double would place the second highest value on Stock A because she is investing for the second longest time.

c.     Mr. Single would place the lowest value on Stock A because he is investing for the shortest time. all of the above are true

d.    Mr. Single, Ms. Double, and Mrs. Triple would all place the same value on Stock A

e.     none of the above are true 

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Insurance companies use probability and expected value to determine their rates. Suppose that 250,000 out of 1,000,000 drivers between the ages of 18 and 22 had a car accident. If the average accident cost the insurance company $1,500 and the insurance company charges $800 for an insurance policy, what is the company’s expected profit per policy?

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Insurance Company X has issued $1 billion of hurricane insurance. Management decides to lay-off part of this risk via reinsurance. They look for companies willing to insure claims above $500 million associated with its current portfolio of hurricane policies. The credit rating of the reinsurance company should not be of any concern to Insurance Company X. This is because insurance companies are well capitalized. (t/f)

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Insurance Market: Anyone can purchase insurance for 1 point. If you are sick and become ill you and you have insurance, you will be compensated 3 points. If you are healthy there is no benefit from insurance. You must pay the 1 point to purchase insurance even if you do not become ill.

Decision 1. You do not know your type. You can either be sick or healthy with a 50% chance of each. Each person chooses to either purchase insurance or not.

Decision 2. Here we will simulate the market if you did know if you are sick. To do this, you must make a choice for each type that you might be. You are either sick or healthy but you must make a choice in each case and only the choice which is your true type (which is randomly assigned as outlined below) is enforced. write your decision for the experiment with one decision for each type that you might be.

In summary, your discussion should look similar to the one below.

Decision 1: XXX

Decision 2: if sick YYY

                   If healthy ZZZ

Now, Where XXX, YYY, and ZZZ are your decisions to either buy or not buy insurance

Note:

Half of the class will be assigned as sick and half of the class will be assigned as healthy. Students will be randomly assigned a type – either Sick(S) or Healthy(H). For each decision you make below, you will either be randomly assigned as sick or healthy. The determination of who is sick and who is healthy is completely random (50% chance of each type) and is independent across the two decisions. If you are sick you face a 50% chance of becoming ill. If you become ill, you suffer a loss of 3 points in this assignment.

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