Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $140, 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 $130,000. 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 99 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 Draw 13 of 14 Next > 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 proft od + ces f. 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 % Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $140, 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 $130,000. 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 99 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 Draw 13 of 14 Next > 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 proft od + ces f. 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 %
