Assume Rays worry value for retention without safety program (WVR) is $850 and his worry value for
Question:
Assume Ray’s worry value for retention without safety program (WVR) is $850 and his worry value for retention with safety program (WVRS) is $400.
a. If Ray’s decision rule is to pick the option that minimizes TOTAL EXPECTED COST, what risk management option does he choose? Make sure that you show all calculations and clearly define TOTAL EXPECTED COST in each case.
b. What is Ray’s PMAX for full insurance without safety program as opposed to retention without safety?
c. During a meeting, the Chief Risk Officer (CRO) told Ray that the most he would pay for full insurance without safety program (as opposed to retention without safety) is $4,000. What is the CRO’s worry value for retention without safety program (WVR)?
d. Who is more risk averse, the CRO or Ray? Explain.
Expert Answer:
a If Rays decision rule is to pick the option that minimizes TOTAL EXPECTED COST what ri... View the full answer
