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1. Assume a firm owns a small warehouse. The warehouse is subject to the risk of a fire. Below is the probability distribution for losses:

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1. Assume a firm owns a small warehouse. The warehouse is subject to the risk of a fire. Below is the probability distribution for losses: Loss (5) P(Loss) 0 0.70 4,000 0.15 8,000 0.09 9,250 0.04 11,500 0.02 The firm has six current risk management options it can use to manage this risk: [1] Retention with a worry value of $750. [2] Insurance policy with a face amount (FA) of $13,000, a premium cost of $1,750 and a deductible of 150. Implement a loss prevention program that costs $50 and changes the probability of a 50 loss to 72%, a $4,000 loss to 17%, a $9,000 loss to 7%, a $9,250 loss to 3%, and a $11,500 loss to 1%. This option has a worry value of $600. [3] Insurance of $11,500 with a premium cost of $2,200. (4) Insurance policy with a FA of $11,500, a premium of $1,900, and a deductible of 175. This option has a worry value of $550. (5) Insurance policy with a face amount (FA) of $11,500, a premium cost of $1,500 and a deductible of 200. Implement a loss reduction program that costs $75 and changes the probability of a $8,000 loss to 12%, a S9,250 loss to 2%, and a $11,500 loss to 1%. All other loss probabilities stay the same. This option has a worry value of $500. [6) Insurance policy with a FA of $12,000, a premium of $2,000, and a deductible of 200. This option has a worry value of $440

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