Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $230, 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 $220,000. a. Make a table of the two possible payouts on each policy with the probability of each. Answer is complete and correct. Outcome Outcome A: B: No Fire Fire! $ 230 $ (210,770) 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? Answer is complete and correct. Variance Expected Return $ 10 Standard Deviation 6954 48351600 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: No Fire $ 480 Outcome: One Fire $ (219,540) 0.1999 Outcome: Two Fires $ (439,540) 0.0001 Payout Probability 99.8000 % % d. What are the expected value, variance and standard deviation of your profit? Expected Return $ 20 Answer is complete and correct. Standard Variance Deviation 96751406 9836 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. Answer is complete and correct. Outcome: Outcome: One Fire Two Fires $ (109,770) $ (219,770) % 0.1999 0.0001 Outcome: No Fire 230 99.8000 Payout Probability g. What are the expected value and variance of your profit? Answer is complete but not entirely correct. Expected Variance Standard Return Deviation $ 10 23673450 X 12963 X