mouse123

Life insurance is most commonly used to hedge against:

A) mortality risk.

B) earnings risk.

C) longevity risk.

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Life insurance is the most commonly employed hedge against mortality risk.

mouse123

A financial asset that is specifically designed to address the problem of outliving one’s assets is called:

A) a guaranteed investment contract.

B) a life annuity.

C) life insurance.

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Life annuities are designed to pay income to the owner as long as the owner is alive. Therefore, unless the insurance company issuing the annuity fails and is unable to make the payments as promised, the annuitant cannot outlive their income.

mouse123

In the following graph which of the following statements is most accurate regarding what the vertical axis represents besides dollars?

A) The point in time when the individual is born and their potential human capital is the greatest while their financial capital is the smallest.

B) The combined amount of human and financial capital called total wealth.

C) The point in time when the individual finishes their educational training and starts working.

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The vertical axis denotes the point in time when the investor finishes preparing for their career by completing their education or training and starts generating income. It also shows the amounts of human and financial capital separately.

mouse123

Which of the following is considered human capital?

A) Social Security payments.

B) Investment gains.

C) Inheritance.

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Human capital is a measure of the individual’s lifetime earning capacity. It is the present value of the individual’s expected income from salary, wages, and bonuses, as well as employment-related retirement pension income. Since social security is derived directly from the investor’s labor it is considered human capital. Both investment gains and inheritance are considered financial capital defined as the total value of financial assets owned.

mouse123

A measure of an individual’s lifetime earning capacity is best defined as which of the following?

A) Financial capital.

B) Total wealth.

C) Human capital.

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The definition of human capital is a measure of an individual’s lifetime earning capacity. It is the present value of the individual’s expected income from salary, wages, bonuses, etc, as well as employment-related retirement pension income. Human and financial capital added together are called total wealth.

mouse123

Social security and other employment-related pension payments are considered:

A) human capital because they are derived directly from the investor’s labor.

B) financial capital because they are derived from an accumulation of the investor’s past labor.

C) neither human capital nor financial capital because they are received after retirement.

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Since social security and other employment-related pension payments are derived directly from the investor’s labor, they are considered human capital. Thus, an individual’s human capital can have a positive value at retirement.