Question

The insurance principle relies on the idea that firm-specific risk among different shares of stock is:____.

Answer 1

The shares of stock of the firm are to be treated as independent when there are specific risk attached to them.

Given an incomplete sentence related to insurance principle.

We are required to fill the blank with appropriate word so that the sentence gives appropriate meaning.

The appropriate word which will fit is independent.

Insurance is basically protection from financial loss. It is the form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An institution which provides insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter.

Because the shares of stock are different so the company needs to get insurance of each types of shares individually.

Hence the insurance principle relies on the idea that firm-specific risk among different shares of stock is independent.

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