Consider the situation of an insurance company which offers personal injury poli
ID: 3388445 • Letter: C
Question
Consider the situation of an insurance company which offers personal injury policies to professional hockey players. The typical payoffs to one of these policies are forecast to be the following:
State
Prob.
Payoff
Athlete is seriously injured
0.01
-5,000,000
Athlete is not injured seriously
0.99
60,000
What is the expected profit per policy? Assuming the returns are uncorrelated policy to policy, how many policies must be sold in order for the standard deviation of the firm's overall portfolio of injury policies to be below $10,000?
Can someone help and show me how its done? Thank you so much.
State
Prob.
Payoff
Athlete is seriously injured
0.01
-5,000,000
Athlete is not injured seriously
0.99
60,000
Explanation / Answer
Consider the situation of an insurance company which offers personal injury poli