If the maximum possible loss increases while P* remains unchanged, Worry Value will increase?

If the maximum possible loss increases while P* remains unchanged, Worry Value will increase?

• A. Decrease
• B. Remain the same
• C. Increase
• D. Become zero

Answer: (C)

Worry Value measures how much protection or capital you’d value to keep risk at a target level given the chance of a loss. If the maximum possible loss goes up while the chance of hitting it stays the same, the downside in dollar terms is larger, so you’d place a higher value on mitigating that risk. In other words, with a fixed probability of loss, increasing the potential loss raises the amount of risk protection you’d be willing to pay for, so the Worry Value increases. The other options don’t fit because they would imply less or no need for protection despite the bigger loss potential.

Worry Value measures how much protection or capital you’d value to keep risk at a target level given the chance of a loss. If the maximum possible loss goes up while the chance of hitting it stays the same, the downside in dollar terms is larger, so you’d place a higher value on mitigating that risk. In other words, with a fixed probability of loss, increasing the potential loss raises the amount of risk protection you’d be willing to pay for, so the Worry Value increases. The other options don’t fit because they would imply less or no need for protection despite the bigger loss potential.