Two accounts, X and Y, are each exposed to a risk that has five possible outcomes. The five outcomes,...

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Two accounts, X and Y, are each exposed to a risk that has five possible outcomes. The five outcomes, the probability of each, and the loss to each account are provided in the following table. (a) Outcome P Q R (b) S T Probability 0.80 0.07 0.02 0.09 0.02 Loss to X 0 200 400 500 1,000 Loss to Y 0 100 200 • The z-score corresponding to the acceptable probability that the actual result will require even more surplus than allocated is 1.5. The required return on marginal surplus is 10%. • You are considering adding Account Y to the existing Account X. 1,500 700 (1.5 points) Calculate each of the following using the Marginal Surplus method: (i) The risk load multiplier (ii) The risk load charged to Account Y (1.5 points) Calculate each of the following using the Marginal Variance method: (i) The risk load multiplier that produces the same risk load for the combined portfolio as that obtained using the Marginal Surplus method (ii) The risk load charged to Account Y (c) (1 point) Demonstrate that the Marginal Variance method is not renewal additive.

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To calculate the risk load multiplier and the risk load charged to Account Y using the Marginal Surplus method we need to consider the surplus require View the full answer