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Suppose Company C is afraid an accident might temporarily disable its factory, which will result in the loss of $5 million in profit one year
Suppose Company C is afraid an accident might temporarily disable its factory, which will result in the loss of $5 million in profit one year in the future; Company C believes there is a 10% probability the accident will occur. The market portfolio is expected to have a rate of return of 7% and the riskfree rate is 2%. Assume accidents are uncorrelated with movements in the stock market.
Calculate the price Company C would pay today to buy accident insurance. Type your answer in the space below, to the nearest dollar.
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