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. Answer is complete and correct. Outcome Outcome Payout No Fire $ 200 Fire! $ (189,800) 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? Answer is complete and correct. Expected Return Variance S 1036063900 Standard Deviation 6 005 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.) Answer is complete and correct. Outcome: One Fire Outcome: Two Fires Payout Probability Outcome: No Fire $ 400 99.8000 $ (189,600) 0.1999 $ (379,600) / 0.0001 % % % d. What are the expected value, variance and standard deviation of your profit? Answer is not complete. Variance Expected Return 20 Standard Deviation e. Compare your answers to (b) and (d). Did risk pooling increase or decrease the variance of your profit? Answer is complete and correct Risk pooling increased the total variance of profit. 1. Continue to assume the company has issued two policies, but now assume 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 Probability g. What are the expected value and variance of your profit? Expected Return Variance Standard Deviation