Key Concepts in Risk, Uncertainty, and Insurance

This set of flashcards covers essential terms and concepts related to risk, uncertainty, and insurance, which are critical for understanding financial decision-making.

Random Variable

A variable that takes on different values with associated probabilities.

Expected Value

The sum of all possible outcomes weighted by their probabilities. It represents the average outcome of a random event.

FICO Score

A credit score developed by Fair Isaac Corporation that measures an individual's credit risk.

Adverse Selection

A situation in insurance markets where those with a higher risk are more likely to buy insurance, potentially leading to higher overall costs for insurers.

Moral Hazard

When one party to a contract can take risks because they do not have to bear the full consequences of their actions.

NPV (Net Present Value)

A method used in finance to determine the value of an investment by calculating the present value of expected future cash flows.

Diversification

The practice of spreading investments across various financial instruments or markets to reduce risk.

Interest Rate

The amount charged by lenders to borrowers for the use of money, usually expressed as a percentage of the principal.

Home Equity Line of Credit (HELOC)

A revolving credit line that uses the borrower's home as collateral.

Risk Premium

The return in excess of the risk-free rate that investors require as compensation for the extra risk taken.