CFA Level I · CFA Level I Exam · Introduction to Risk Management
Two firms form a joint venture to drill an expensive exploration well, with each funding half of the cost and receiving half of any proceeds. Relative to drilling alone, this arrangement is best described as risk:
The arrangement is risk sharing. The two firms split costs and proceeds, so each bears only part of the exploration risk. The activity still goes ahead and part of the exposure remains with each firm, so it is neither avoidance nor elimination.
- ASharingCorrect
- BAvoidance
- CElimination
Explanation
Risk sharing is a form of transfer in which the risk is split among parties, here by splitting costs and proceeds. Each firm still bears part of the risk, so it is not avoided or eliminated.
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