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Suppose Joe and Leo both face the following individual loss distribution: Probability of LossAmount of Loss 0.7$0 0.3$40 Determine the expected loss faced by Joe
Suppose Joe and Leo both face the following individual loss distribution:
Probability of LossAmount of Loss
0.7$0
0.3$40
Determine the expected loss faced by Joe and Leo on an individual basis. Calculate the variance of the loss. Now assume Joe and Leo enter a pooling arrangement. Show how this affects their expected losses. Does the expected loss change? Calculate the variance of the loss if they are in a pooling arrangement. Does the variance of the loss change? How?
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