BU353- Midterm Exam Guide - Comprehensive Notes for the exam ( 20 pages long!)
Document Summary
Insurance premium = expected loss + expenses of insurer + profit loading + contingency loading. Expenses of insurer + profit loading + contingency loading => loading is the cost of loss financing not the full premium. 90,000; because wealth with or without loss are the same. Insurance is a transfer of wealth from no loss to a loss state. The more insurance you buy, the less the variance, vice versa. Project a: u(proj a) = ln(2 mil + 0. 5 mil) = 14. 73. E [u (proj b)] = 0. 5*ln(4. 3 mil + 0. 5 mil) + 0. 5*ln(-0. 1 mil + 0. 5 mil) = = 0. 2 [2500-500] + 0. 8 [0-500] = 1 million. Note: pooling does not change the expected cost. = 0. 64(0 - 500) + 0. 32(1250 - Once the size of pooling reaches 1000, the probability of the likelihood of the extreme outcomes is almost 0. Correlation: measures how random variables are related.
