Time and Uncertainty - chapter 11
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19 Terms
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interest rate
The ________ is the amount needed to compensate the lender for the opportunity cost of loaning out money.
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Risk aversion
________ makes a market for insurance profitable.
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Diversification
the process by which risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual.
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Risk
exists when the costs or benefits of an event or choice are uncertain.
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Adverse selection
a state that occurs when buyers and sellers have different information about the quality of a good or the riskiness of a situation; results in failure to complete transactions that would have been possible if both sides had the same information.
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Insurance
________ is a common strategy for managing risk.
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insurance policy
A(n) ________ lets people pay to reduce uncertainty in some aspect of their lives.
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Risk pooling
organizing people into a group to collectively absorb the risk faced by each individual.
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interest rate
The ________ is the cost of borrowing money for a certain unit of time.
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Compounding
the process of accumulation that results from the additional interest paid on previously earned interest
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present value
how much a certain amount of money that will be obtained in the future is worth today
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Risk
exists when the costs or benefits of an event or choice are uncertain
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expected value
the average of each possible outcome of a future event, weighted by its probability of occurring
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Risk-averse
having a low willingness to take on situations with risk
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Risk-seeking
having a high willingness to take on situations with risk
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risk pooling
organizing people into a group to collectively absorb the risk faced by each individual
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Diversification
the process by which risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual
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moral hazard
the tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions
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Future value
= Present value x (1 + r)^n