Suppose that Kate and Anne enter into a pooling arrangement. Assume that both women have the following

Question:

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?

Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...