Which of the following statements about the risk pooling is correct?
A) Risk pooling works best if the parties involved have heterogeneous risk characteristics.
B) Risk pooling works best if the number of parties involved is small.
C) Risk pooling works best if the loss experience of the parties involved is statistically dependent.
D) Risk pooling, assuming some assumptions are met, reduce overall risk.

Question

Quizplus · Accepted Answer

Risk pooling, assuming some assumptions are met, reduces overall risk. This is because pooling risks across a larger group of individuals or entities allows for the sharing of potential losses, which spreads the risk and reduces the impact on any one party. This is the basis for insurance and other risk-sharing mechanisms. Heterogeneous risk characteristics and statistically dependent loss experience can also benefit from risk pooling, but they are not the most critical factors for its effectiveness. The number of parties involved can also vary depending on the context and purpose of the risk pooling.

Which of the Following Statements About the Risk Pooling Is