Corporate Finance

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Enfurq_87

Business Finance

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Revise the last sheet so that there are 10 people in the insurance pool. Assume that each individual has an 80% chance of not having an accident, and 20% chance of having an accident. If accident happens, insurance company is expected to pay $25,000 to cover each accident. Calculate the expected loss and risk per participant. Write a short paragraph of how your numbers compare to the case of only 3 participants in the insurance pool. Make sure to make an argument about why you see the difference, if any, in the results.  

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State of Nature No accident Fender-Bender Accident Expected Value Variance Standard Deviation (Risk) Mean Absolute Deviation (MAD) Probability Payoff Absolute Deviation 80.0% 0 $ 5,000.00 0.0% $ (3,000.00) $ 2,000.00 20.0% $ (25,000) $ 20,000.00 $ $ $ (5,000.0) 100,000,000 10,000.00 8,000.00 States No Accident One Accident Both Accident Expected Value Variance Standard Deviation (Risk) Mean Absolute Deviation (MAD) Number in Pool Probabilities 64% 32% 4% 2 Payoffs $ $ (25,000.00) $ (50,000.00) Absolute Deviation $ 10,000.00 $ 15,000.00 $ 40,000.00 Per Person $ (10,000.0) $ (5,000.0) 200,000,000 $ 14,142.14 $ 7,071.1 $ 12,800.00 $ 6,400.0 Number of Accidents 0 1 2 3 Expected Value Variance Standard Deviation (Risk) Mean Absolute Deviation (MAD) Number in Pool Probabilities 51.2% 38.4% 9.6% 0.8% 3 Payoffs $ $ (25,000.00) $ (50,000.00) $ (75,000.00) Absolute Deviation $ 15,000.00 $ 10,000.00 $ 60,000.00 Per Person $ (15,000.0) $ (5,000.0) 300,000,000 $ 17,320.51 $ 5,773.5 $ 12,000.00 $ 4,000.0 Number of Accidents 0 1 2 3 4 Expected Value Variance Standard Deviation (Risk) Mean Absolute Deviation (MAD) Number in Pool Probabilities 41.0% 41.0% 15.4% 2.6% 0.2% 4 Payoffs $ $ (25,000.00) $ (50,000.00) $ (75,000.00) $ (100,000.00) Absolute Deviation $ 20,000.00 $ 5,000.00 $ 80,000.00 Per Person $ (20,000.0) $ (5,000.0) 400,000,000 $ 20,000.00 $ 5,000.0 $ 10,368.00 $ 2,592.0
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Attached.

State of Nature
No accident
Fender-Bender
Accident
Expected Value
Variance
Standard Deviation (Risk)
Mean Absolute Deviation (MAD)

Probability

Payoff
Absolute Deviation
80.0%
0 $
5,000.00
0.0% $
(3,000.00) $
2,000.00
20.0% $
(25,000) $
20,000.00
$
$
$

(5,000.0)
100,000,000
10,000.00
8,000.00

States
No Accident
One Accident
Both Accident
Expected Value
Variance
Standard Deviation (Risk)
Mean Absolute Deviation (MAD)
Number in Pool

Probabilities
64%
32%
4%

2

Payoffs
$
$ (25,000.00)
$ (50,000.00)

Absolute Deviation
$
10,000.00
$
15...


Anonymous
I was struggling with this subject, and this helped me a ton!

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