"Portfolio Management":risk transfer

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Questions 1:

An example of risk transfer combined with self-insurance is most likely:

A、 a bond portfolio hedged with an interest rate option.

B 、an insurance policy with a deductible.

C、 a bank that establishes a loan loss reserve fund.

Questions 2:

A company’s $100 par value perpetual preferred stock has a dividend rate of 7% and a required rate of return of 11%. The company’s earnings are expected to grow at a constant rate of 3% per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being:

A、 overvalued by $11.36.

B、 undervalued by $15.13.

C、 undervalued by $36.36.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. Risk transfer is accomplished through an insurance policy. A deductible in an insurance policy means the insured is bearing some of the risk of loss and thereby (partially) self-insuring. Hedging with derivatives accomplishes risk shifting, not risk transfer. A bank loan loss reserve is a form of self-insurance combined with diversification, but it does not include risk transfer.

A is incorrect because hedging with derivatives accomplishes risk shifting, not risk transfer.

C is incorrect because a bank loan loss reserve is a form of self-insurance combined with diversification, but it does not include risk transfer.

【Answer to question 2】A

【analysis】

A is correct.

Portfolio Management:risk transfer