ECO102H1 Chapter Notes - Chapter 20: Market Risk, Insurance Policy, Insurance
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ECO102H1 Full Course Notes
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People don"t like risk & are willing to pay a price to avoid it. Random variable: a variable that has an uncertain future value no one can predict with certainty which of its possible values or outcomes a random variable may take. An actuary (trained in evaluating uncertain future events) could calculate the expected value of expenses next year weighted average of all possible values, weights on each possible value correspond to the likelihood of that value occurring. To get the general formula for the expected value of a random variable, we imagine there are # of different states of the world. Each state is associated with w/ different realized value - value that occurs in that state of the random variable. Don"t know which state of the world will actually happy, but you can assign possibilities, one for each state of the world.
