Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $200, the probability of a fire is 0.1%, and in the event of

image text in transcribedimage text in transcribed

Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $200, 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 $190,000. a. Make a table of the two possible payouts on each policy with the probability of each. Outcome A: No Fire Outcome B: Fire! Payout b. Suppose you own the entire firm, and the company issues only one policy. What are the expected value, variance and standard deviation of your profit? 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 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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Understanding Decentralized Finance How DeFi Is Changing The Future Of Money

Authors: Rhian Lewis

1st Edition

1398609390, 978-1398609396

More Books

Students also viewed these Finance questions

Question

The company openly shares plans and information with employees.

Answered: 1 week ago