Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $240, 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 $230,000. a. Make a table of the two possible payouts on each policy with the probability of each.
| | outcome no fire | outcome fire |
| payout | $240 | unsure |
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 |
| $10 | unsure | unsure |
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 | % | % | .0001% |
d. What are the expected value, variance and standard deviation of your profit?
| expected return | variance | standard deviation |
| $20 | | |
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.
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 | | | |
g. What are the expected value and variance of your profit?
| Expected return | variance | standard deviation |
| | | |
Nelghborhood Insurance sells fire Insurance policies to local homeowners. The premium is $240, 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 $230.000 a. Make a table of the two possible payouts on each policy with the probability of each. Answer is not complete. Outcome outcome No Fire Fire! $ 240 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 not complete. Variance Expected Return $ 10 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 probabilitles. (Round your "Probability" answers to 4 decimal places.) 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 not complete. Outcome: Outcome: One Fire Two Fires Outcome No Fire Payout Probability % % 0.0001 % d. What are the expected value, variance and standard deviation of your profit? Answer is not complete. Expected Variance Standard Return Deviation $ 20 e. Compare your answers to (b) and (d). Did risk pooling Increase or decrease the vartance of your profit? Risk pooling the total variance of 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 probabilitles. (Round your "Probability" answers to 4 decimal places.) Answer is not complete. Outcome: No Fire Outcome One Fire Outcome: TWO Fires Payout Probability g. What are the expected value and variance of your profit? Answer is not complete. Standard Variance Deviation Expected Return Nelghborhood Insurance sells fire Insurance policies to local homeowners. The premium is $240, 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 $230.000 a. Make a table of the two possible payouts on each policy with the probability of each. Answer is not complete. Outcome outcome No Fire Fire! $ 240 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 not complete. Variance Expected Return $ 10 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 probabilitles. (Round your "Probability" answers to 4 decimal places.) 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 not complete. Outcome: Outcome: One Fire Two Fires Outcome No Fire Payout Probability % % 0.0001 % d. What are the expected value, variance and standard deviation of your profit? Answer is not complete. Expected Variance Standard Return Deviation $ 20 e. Compare your answers to (b) and (d). Did risk pooling Increase or decrease the vartance of your profit? Risk pooling the total variance of 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 probabilitles. (Round your "Probability" answers to 4 decimal places.) Answer is not complete. Outcome: No Fire Outcome One Fire Outcome: TWO Fires Payout Probability g. What are the expected value and variance of your profit? Answer is not complete. Standard Variance Deviation Expected Return
