Risk-averse individuals make risky investments A) never. B) ...

[mcmcdaniel]

Risk-averse individuals make risky investments
 
  A) never.
  B) when the investment's expected return exceeds the return on a non-risky investment.
  C) when the investment's expected return adequately compensates for the risk.
  D) only when they are feeling irrational.

Question 2

Explain why insurance companies usually do not offer earthquake insurance.
 
  What will be an ideal response?

[mk6555]

Answer to Question 1

C

Answer to Question 2

Insurance companies diversify their risk by covering many people who mostly have uncorrelated expected losses. However, an earthquake usually causes losses to many people in an area. Thus, earthquake losses are very much positively correlated and cannot be easily diversified. Insurance companies do not want to face losses they cannot easily diversify.