… are available at http://fin4335.garven.com/spring2020/ps4solutions.pdf.
… are available at http://fin4335.garven.com/spring2020/ps3solutions.pdf.
PDF’s of today’s class problem and solutions are available here:
Note also that the probability of a loss exceeding $1,500 when n =1 (i.e., when there is no risk pooling) is:
This problem showcases the tremendous advantage afforded to consumers from the pooling of risk, by reducing the probability of a large loss by almost 60% when risks are iid and n =5 (question 1), and by reducing the probability of a large loss by more than 80% when risks are iid and n =10 (question 2). However, the introduction of positive correlation in question 3 significantly reduces the efficacy of risk pooling, since for n =10 and , there is a 12.57% probability that the loss on an average policy will exceed $1,500.
… are available at http://fin4335.garven.com/spring2020/ps2solutions.pdf.
… are available at http://fin4335.garven.com/spring2020/ps1solutions.pdf.