Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $170, the probability of...
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Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $170, the probability of a fire is 0.1%, and in the event of a fire, the insured damages (the payout on the policy) will be $160,000. c. Now suppose your company issues two polities. The risk of fire is independent across the two policies. Make a table of the three possible payouts along with their associated probabilities. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decimal places.) Payout Probability Outcome: No Fire Outcome: One Fire Outcome: Two Fires % d. What are the expected value, variance, and standard deviation of your profit? (Do not round intermediate calculations. Round your standard deviation to the nearest whole number.) Expected Return Variance Standard Deviation e. Compare your answers to (b) and (d). Did risk pooling increase or decrease the variance of your profit? Risk pooling the total variance of profit. f. Continue to assume the company has issued two policies, but now assume you take on a partner, so that you each own one-half the firm. Make a table of your share of the possible payouts the company may have to make on the two policies, along with their associated probabilities. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decim places.) Payout Probability Outcome: No Fire Outcome: One Fire Outcome: Two Fires g. What are the expected value and variance of your profit? Expected Return Standard Variance Deviation Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $170, the probability of a fire is 0.1%, and in the event of a fire, the insured damages (the payout on the policy) will be $160,000. c. Now suppose your company issues two polities. The risk of fire is independent across the two policies. Make a table of the three possible payouts along with their associated probabilities. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decimal places.) Payout Probability Outcome: No Fire Outcome: One Fire Outcome: Two Fires % d. What are the expected value, variance, and standard deviation of your profit? (Do not round intermediate calculations. Round your standard deviation to the nearest whole number.) Expected Return Variance Standard Deviation e. Compare your answers to (b) and (d). Did risk pooling increase or decrease the variance of your profit? Risk pooling the total variance of profit. f. Continue to assume the company has issued two policies, but now assume you take on a partner, so that you each own one-half the firm. Make a table of your share of the possible payouts the company may have to make on the two policies, along with their associated probabilities. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decim places.) Payout Probability Outcome: No Fire Outcome: One Fire Outcome: Two Fires g. What are the expected value and variance of your profit? Expected Return Standard Variance Deviation
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