BU353 Chapter Notes - Chapter 4: Central Limit Theorem
Document Summary
Chapter 4: pooling arrangements and diversification of risk. Diversification of risk is one of the most important risk management concepts. Pooling arrangement parties pool their resources to pay evenly any accident costs that may occur. Additional risk reduction can be obtained from pooling by adding additional people (or businesses) to the arrangement. Law of large numbers as the number of participants increases, the average outcome is likely to get very close to the expected value. The amount of risk that can be reduced through pooling arrangements increases as the number of participants increases. Central limit theorem as the number of participants increases, the distribution of the average outcome becomes more symmetric and bell shaped. Distribution costs the substantial costs in marketing and in specifying the terms of agreement incurred in risk pooling arrangements (costs associated with adding participants to risk pools)
