5. Mr. Johnson wants to buy insurance against his house burning down. The insurance will pay M Johnson $500,000 if his house burns down. The probability that Mr. Johnson's house will burn down in a given year is 0.005, so the probability that it will not burn down is 0.995. The insurance premium for the policy is $2,000 per year. (a) Determine the expected return for the insurance company. (b) Because the insurance company is losing money on house insurance, a company office asks the premium manager to determine the annual premium required for the insurance company to make $1,000 on each $500,000 policy. Determine the annual premium.
5. Mr. Johnson wants to buy insurance against his house burning down. The insurance will pay M Johnson $500,000 if his house burns down. The probability that Mr. Johnson's house will burn down in a given year is 0.005, so the probability that it will not burn down is 0.995. The insurance premium for the policy is $2,000 per year. (a) Determine the expected return for the insurance company. (b) Because the insurance company is losing money on house insurance, a company office asks the premium manager to determine the annual premium required for the insurance company to make $1,000 on each $500,000 policy. Determine the annual premium.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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