Farmers who purchase insurance against crop failures tend to be pooled with farmers far away.Why might this be the case?
A) The weather in a single geographic area represents idiosyncratic risk, which is diversifiable.
B) The weather in a single geographic area represents systematic risk, which is not diversifiable.
C) The weather in far-flung geographic areas represents systematic risk, which is not diversifiable.
D) The weather in far-flung geographic areas are commonly positively correlated.

Question

Quizplus · Accepted Answer

Pooling farmers from different geographic areas helps in diversifying idiosyncratic risks, such as localized weather patterns, which can vary significantly from one area to another. This diversification reduces the overall risk for insurers.

Farmers Who Purchase Insurance Against Crop Failures Tend to Be