problem 12-8 hometown insurance annuity simulation problem

Project Description:

hometown insurance sells 10‐year annuities to retirees who are looking for stable
sources of investment income. hometown invests the annuity funds it receives in an
equity index fund with annual returns that are normally distributed with a mean of
9% and standard deviation of 3%. it guarantees investors a minimum annual return
of 6% and a maximum return (or rate cap) of 8.5%. this limits both the retirees'
down‐side risk and up‐side return potential. of course, hometown makes its money
on these contracts when the actual return exceeds the rate cap. suppose a retiree in
vests $50,000 in such an annuity contract. assume investment earnings are credited
at the end of the year and are reinvested.
a. build a spreadsheet model for this problem that computes the profit hometown
would make on the contract.
b. how much money can hometown expect to make on average on the contract?
c. what is the probability that hometown would lose money on the contract?
d. suppose that hometown wants to identify the minimum guaranteed annual rate
of return that provides a 2% chance of the company losing money on the con
tract. what should the minimum guaranteed annual rate of return be?
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Price Type: Negotiable

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