Assume that a driver faces the following loss distribution: Loss 10,000 0 Probability .04 .96 These...

Assume that a driver faces the following loss distribution:

Loss 10,000 0

Probability .04 .96

These two drivers decide to pool their losses with two other drivers with the same loss distribution, and all losses are not correlated, i.e., independent.

6. What is the expected loss for each member of the pool?
7. What is the standard deviation of loss for each member of the pool?

Now consider another group of four drivers who have formed a separate pool, and who each have this loss distribution( before pooling):

Loss
15,000 10,000 0

Probability

.01 .05 .94

8. What is the expected loss for each member of this new pool of four drivers (after pooling)?

9. What is the standard deviation of loss for each member of this new pool (after pooling)?

10. If all 8 drivers decide to pool their risks, what would the expected loss for each member of this pool of eight drivers be?

Solutions

Expert Solution

milcah answered 8 months ago

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