Assignment 6 22 Neighborhood Insurance sells fire insurance policies to local homeowners. The premium the event of a fire, the insured damages (the payout on the policy) will be $180,000 $190, the probability of a fire is 01%, and in 10 a. Make a table of the two possible payouts on each policy with the probability of points Outcome A: No Fire eBook Outcome B: Fire! 1 Payout Paint b. Suppose you own the entire firm, and the company issues only one policy. What are the expected deviation of your profit? variance and standard Expected Return Variance Standard Deviation c. Now suppose your company issues two policies. The risk of fire is independent across the two policies. Make a table of the three possible payouts along with their associated probabilities. (Round your "Probability" answers to 4 decimal places.) Outcome: No Fire Outcome One Fire Outcome: Two Fires Payout Probability d. What are the expected value, variance and standard deviation of your profit? Expected 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 pro ment 6 0 f. Continue to assume the company has issued two policies, but now assure you take on a partner, so that you each own one-half of 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. (Round your "Probability answers to 4 decimal places.) Outcome: No Fire Outcome One Fire Outcome: Two Fires Payout rences Probability g. What are the expected value and variance of your profit? Expected Return Variance Standard Deviation Assignment 6 22 Neighborhood Insurance sells fire insurance policies to local homeowners. The premium the event of a fire, the insured damages (the payout on the policy) will be $180,000 $190, the probability of a fire is 01%, and in 10 a. Make a table of the two possible payouts on each policy with the probability of points Outcome A: No Fire eBook Outcome B: Fire! 1 Payout Paint b. Suppose you own the entire firm, and the company issues only one policy. What are the expected deviation of your profit? variance and standard Expected Return Variance Standard Deviation c. Now suppose your company issues two policies. The risk of fire is independent across the two policies. Make a table of the three possible payouts along with their associated probabilities. (Round your "Probability" answers to 4 decimal places.) Outcome: No Fire Outcome One Fire Outcome: Two Fires Payout Probability d. What are the expected value, variance and standard deviation of your profit? Expected 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 pro ment 6 0 f. Continue to assume the company has issued two policies, but now assure you take on a partner, so that you each own one-half of 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. (Round your "Probability answers to 4 decimal places.) Outcome: No Fire Outcome One Fire Outcome: Two Fires Payout rences Probability g. What are the expected value and variance of your profit? Expected Return Variance Standard Deviation