The financial affairs of the Johnsons have become much more complicated since we began following...

The Johnsons Decide How to Manage Their Risks

The financial affairs of the Johnsons have become much more complicated since we began following them in Chapter 2. Both Harry ($275 per month) and Belinda ($300 per month) have been given raises at work. They have purchased a $125,000 condominium that has added about $400 per month to their housing expense. They have purchased a used car for $3200, adding about $120 per month to their expenses. As a result of these changes, Harry and Belinda realize that they now face greater risks in their financial affairs. They have decided to review their situation with an eye toward managing their risks more effectively. Use Table 10.1, their net worth and income and expense statements at the end of Chapter 3, and other information in this chapter to answer the following questions:

(a) What are Harry and Belindas major sources of risk from home and automobile ownership, and what is the potential magnitude of loss from each?

(b) Given the choices listed in step 3, how should the Johnsons handle the sources of risk listed in part a?