A risk-averse student can insure a bicycle against theft at an actuarially fair premium, with full reimbursement and no other frictions. Why is full insurance attractive?

Question

Answer

It guarantees that no premium must be paid

Answer

It reduces risk while keeping expected wealth unchanged

Answer

It raises both expected wealth and variance

Answer

It increases expected wealth

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A risk-averse student can insure a bicycle against theft at an actuarially fair ...

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