Question
Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $110, the probability of a fire is 0.1%, and in the event of
Neighborhood Insurance sells fire insurance policies to local homeowners. The premium is $110, 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 $100,000. 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 |
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 | % | % | 0.0001 | % |
d. What are the expected value, variance and standard deviation of your profit?
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