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 $360, 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 $360, 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 $350,000. Required: a. Make a table of the two possible payouts on each policy with the probability of each. (Negative answers should be indicated with a minus sign.) Answer is complete and correct. 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? (Do not round intermediate calculations. Round your standard deviation to the nearest whole number.) 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. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decimal places.) d. What are the expected value, variance, and standard deviation of your profit? (Do not round intermediate calculations. Round your standard deviation to the nearest whole number.) Answer is complete but not entirely correct. e. Compare your answers to (b) and (d). Did risk pooling increase or decrease the variance of your profit? 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. (Negative answers should be indicated with a minus sign. Round your "Probability" answers to 4 decimal places.) g. What are the expected value and variance of your 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

Finance For Executives Managing For Value Creation

Authors: Gabriel Hawawini, Claude Viallet

7th Edition

1473778913, 978-1473778917

More Books

Students also viewed these Finance questions

Question

2. Are they aware of the assumptions they are making?

Answered: 1 week ago

Question

Are there any disadvantages to this tactic?

Answered: 1 week ago

Question

Who is the assigned manager for each tactic?

Answered: 1 week ago