Paraphrasing with good grammar and readability.

timer Asked: Nov 4th, 2016

Question description

Insurance contracts does not exist for some of the risks because of following reasons:

1. Risk cannot be quantitatively evaluated and it is full of ambiguity.
2. The magnanimity of the risk is too huge to cover. For example, losses due to Tsunami.
3. Risk Associated with natural disasters
4. Risk associated with emotions and psychology of a person that cannot be verified.
Government programs also run with a motive of social welfare. That causes these programs take responsibility to cover some of the risks, an individual face. For example, insurance of deposits made by people is done by government bodies. Thus, these risks are taken care of by the government programs. It reduces the burden from individuals of managing all risks by themselves.
Due to the emergence of such programs, individuals prioritize their needs and manage risk accordingly. Some of the risk is managed by themselves. Further, they follow the guidelines of government programs to make them manage other risks as part of social welfare initiatives.


1. While making investment decision, there are other factors other than risk and return, they are attitude of investors whether they are risk averse or not, other charges or loads on investment, downside risk, past performance of the stock, stability of the return, quick disposal facility i.e liquidity of stock etc.

2. To select between Stock A or Stock B, it is better to calculate Covariance for both the stocks as it measures the risk in absolute terms ie. what is the risk of stock for every 1% return.

Covariance = Standard deviation/Mean

Covariance of Stock A = 8.30%/15% = 0.55

Covariance of Stock B = 2.10%/14% = 0.15

Stock B is the best as its covariance is the lower than Stock B. In the case of Stock A there is a risk of 0.55 for every 1% of return, where as in case of Stock A, the risk is only 0.15 for every 1% of return; Hence, Stock B is the best choice, so I recommend Stock B

3. The reasons for which I recommend stock B is that of lower risk, and when compared to Stock A, the return is almost the same and this return is greater than risk free rate and consistency of return exists than Stock A

4. The client will get stable return with low risk, so he also may prefer Stock B rather than Stock A unless he is risk lover.

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