Insurance hypothesis tells us that:
A) investors will demand that financial reports be audited as a way of insuring against some of their loss should their investment fail.
B) investors can insure themselves against loss by investing in a diverse investment portfolio should an individual investment fail.
C) investors cannot insure themselves against loss when investing in an entity.
D) the entity can take out insurance to protect itself from such risks as employee or management fraud which can lead to material misstatements in the financial statements.

Question

Quizplus · Accepted Answer

The insurance hypothesis suggests that investors can partially insure themselves against loss by demanding audited financial reports from the entity in which they invest. The audit provides increased assurance that the financial statements are reliable, which reduces the risk of investing in the entity. Therefore, choice A is the best answer. Choice B is a valid investment strategy, but it does not pertain specifically to the insurance hypothesis. Choice C is not accurate since investors can partially insure themselves against loss. Choice D is also incorrect, as insurance taken out by the entity would not necessarily protect investors from losses.

Insurance Hypothesis Tells Us That