In today's case study question two terminologies are used:

1. decision theory: decision theory is about deciding between two alternates. In our case, two cases are retaining the risk or having insurance. You are comparing two options. how much is the expected cost when retaining and cost when having insurance and which one is cheaper

2. minmax: is the concept choosing from retaining and insurance which method minimizes loss of two methods.

Q1.

Gillian recently purchased a new home which cost her $350,000.She has installed a home security system and has fire exinguishers all over her home. she feels that the precautions she has taken to protect her home may be enough, and she is seriously considering not purchaing home insurance will cost $2,000 and the insurance company estimates that there is a 0.5% chance that the home will be totally destroyed.

(a) Using decision theory, calculate the expected value of her two options: insuring the risk. Which one would you choose using htis method? (retain the risk)

(b) Using the minimax strategy, which alternative would Gillian choose? (insurance)

Q.2

(a) A few years ago, Maple Leaf Foods had a bad run after many people got sick with listeria. What kind of business risk does this present for the company?

(b) Is the possibility that the goverment of a nation can be overthrown by a foreign army an example of a fundamental risk or a particular risk?