# Question: Suppose that Kate and Anne enter into a pooling arrangement

Suppose that Kate and Anne enter into a pooling arrangement. Assume that both women have the following loss distributions and that losses are independent.

$50,000 with probability of 0.005

$20,000 with probability of 0.01

$10,000 with probability of 0.02

$0 with probability of 0.965

a. Write out the possible outcomes and the probability of each outcome for Kate and Anne after they enter into a pooling arrangement. That is, writ out the probability distribution for each of the women after they enter into a pooling arrangement.

b. Calculate the expected loss to each person prior to and subsequent to entering into a pooling arrangement.

c. What happens to the standard deviation of the distribution of losses to each individual subsequent to the pooling arrangement?

$50,000 with probability of 0.005

$20,000 with probability of 0.01

$10,000 with probability of 0.02

$0 with probability of 0.965

a. Write out the possible outcomes and the probability of each outcome for Kate and Anne after they enter into a pooling arrangement. That is, writ out the probability distribution for each of the women after they enter into a pooling arrangement.

b. Calculate the expected loss to each person prior to and subsequent to entering into a pooling arrangement.

c. What happens to the standard deviation of the distribution of losses to each individual subsequent to the pooling arrangement?

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