Creating the decision tree of insurance policy

Reference no: EM1323004

Q1) It snows a lot in Aspen. Simulate snowfall for first month of the snow season. Find out the accumulation. Plot what ski run snow cover looks like for this month. Compute the EV of the month's snowfall -- what does this number signify?

Daily Snowfall in Aspen

Inches	Probability
12	0.02
8	0.08
6	0.15
3	0.25
1	0.2
-1	0.15
-3	0.1
-5	0.05

2) A home owner is thinking of insuring contents of his house against theft for one year. He evaluates that contents of his house would cost him= $40,000 to replace. Local crime statistics point out that there is a probability of 0.03 that his house will be broken into in coming year. In that event his losses would be 10%, 20%, or 40% of contents with probabilities 0.5, 0.35 and 0.15 respectively.

Insurance policy from company A costs $300 a year but guarantees to replace any losses due to theft. Insurance policy from company B is cheaper at $200 a year but householder has to pay first $X of any loss himself. Insurance policy from company C is even cheaper at $150 a year but only replaces fraction (Y%) of any loss suffered.

Suppose that there can be at most one theft a year.

a) Create the decision tree.

b) What would be your advice to home owner if X = 50 and Y = 40% ?

Reference no: EM1323004

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