3.Assumptions:

* Initial Wealth = $1,000

* Premium Loading = 20% of Pure Premium

* U(W) = rootW

*Probability distribution of Loss

Probability Loss

0.5 0

0.1 80

0.2 160

0.1 400

0.1 800

Will a risk averse person prefer

(1) no insurance, (2) full insurance,(3) insurance with a $60 deductible, (4) partial insurance with a 25% participation clause, (5) partial insurance with a coverage limit equal to $300 ?

*(hint): Wealth_i = Initial WealthGross PremiumL_i Insurance Payment_i