Chapter 6, Problem 25C

Summary Introduction

(A)

In this question we have to calculate the two possible payouts when it is given that insurance premium is $110, damage cover to be given by the company is $100,000 and probability of any damage is due to fire is 0.001.

Summary Introduction

(B)

To determine:

Expected value and variance of the profit

Summary Introduction

(C)

In this case we have to prepare a table for three possible payouts, if there are two policies instead of three.

Summary Introduction

(D)

In this part we have to calculate expected value of profit and variance of profit.

Summary Introduction

(E)

Did risk pooling increase or decrease the variance of your profit.

Summary Introduction

(F)

To determine:

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.

Summary Introduction

(G)

To determine:

What are the expected values and variance of your profit.

Summary Introduction

(H)

To determine:

What happened to the risk and what about your expected profit?

Summary Introduction

(I)

To determine:

What do you conclude about risk sharing versus risk pooling?