Willing to pay to avoid the uncertainty of the gamble

Assignment Help Basic Statistics

Reference no: EM131048627

Question 1:

Recall the St. Petersburg game. It starts at $2. Toss a coin and if a head appears, thepot doubles. If tails appears, you win the pot at that time and thegame ends.So, if you get H, H, H T, you win $16. The payoff table is,

First head on toss: 1 2 3 4 4 [...] n
Payoff, x $2 $4 $8 $16 $32 $2n

Assume that your utility function is U(x)=√x .

Question 1A. What is the expected monetary value of the game, and what should you be willing to pay to play this game?

Question 1B. Do these values differ? If so, explain why the do.

Question 1C. What is the risk premium you are willing to pay to avoid the uncertainty of the gamble.

Avoiding catastrophic risks

SaveAlot Insurance Co. of Falls Church, VA approaches you for advice on reinsurance protection for their natural hazards class of business. SaveAlot is in the direct insurance business in the Maryland-Virginia region.
SaveAlot'sNet Retention per year for a certain book of policies is $10m. They are now looking to purchase additional reinsurance treaty capacity either on,

(1) a quota share basis of 40% without retention and with a capacity of $50m, or
(2) a surplus share basis with a capacity of $50m, or
(3) an excess of loss basis.

For simplicity, presume the premiumsfor the three proposals for the coming year are $2m, $3m, and $5m,respectively.

Question. If SaveAlot suffers $65m in claims on its book of policies next year, how much would their total loss (including premium) be under the three possible reinsurance options?

Reference no: EM131048627

Questions Cloud

Case study-seat of the pants : Gaurav cleaning centers doesn't have a formal wage structure nor does it have rate ranges or use compensable factors. Wage rates are based mostly on those prevailing in the surrounding community and tempered with an attempt on the part of Gaurav t..

Recall the st petersburg game : Recall the St. Petersburg game. It starts at $2. Toss a coin and if a head appears, the pot doubles. If tails appears, you win the pot at that time and the game ends. So, if you get H, H, H T, you win $16. The payoff table is,

Compute the shear stress in the boundary layer : Air forms a boundary layer near a solid wall, in which the velocity profile is sinusoidal. The boundary-layer thickness is 7mm and the peak velocity is 9m/s. compute the shear stress in the boundary layer at y=0 and y=7mm

Roles and responsibilities of the administration : Working on the same two facilities that you identified in W3 Assignment 2, prepare a 8- to 10-page report in a Microsoft Word document including the following: Describe the roles and responsibilities of the administration in each department of y..

Willing to pay to avoid the uncertainty of the gamble : Recall the St. Petersburg game. It starts at $2. Toss a coin and if a head appears, thepot doubles. If tails appears, you win the pot at that time and thegame ends.So, if you get H, H, H T, you win $16. The payoff table is,

Estimate average annual household expenditure in each age : Estimate average annual household expenditure in each age group of household head taking into account the average number of people in the household and the US Department of Commerce (DOC) equivalence scales

First payment occurring at lease inception : Your firm is considering leasing a magic box. The lease lasts for three years. The lease calls for three payments of $1,350 per year with the first payment occurring at lease inception. The magic box would cost $3,600 to buy and would be straight-lin..

The potential adoption of flat-rate tax structure : There are a number of taxation rate structures in use in various countries in the world. For citizens residing in the United States, a progressive tax rate structure is applicable presently. Write a report comparing the advantages and disadvantages o..

Summer camp for kids with the average expenses : Pat Davis runs a summer camp for kids with the average expenses in each month as shown below. The camp uses a savings account for all funds that pays interest of 1.00% nominal annual rate with monthly compounding. Pat is getting older and wants to fu..

User Account

All Pages