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? 

  • CreatedAugust 26, 2013
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