Solutions to Problem Set 1

This has mean 2k and zero variance so the criterion

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: you want to maximize the mean ­variance 1 criterion E [ X ] " Var( X ) . 2 c) Would you want to purchase an insurance policy that costs $2000 and covers all accident costs? Justify. ! Note: The parameter ½ is unrealistic. If you wanted to use the mean variance criterion in practice (which, as we’ll see later in the course, you shouldn’t even though people still do), you would have to pick a much larger parameter. Yes. If you buy insurance, you always pay $2000. This has mean  2k and zero variance, so the criterion is  2k. If you don’t buy insurance, you save the $2000 but you pay the damages described in the slides. The damages have mean  860 and variance 5,981,800. The mean variance criterion is then  ­860 ­5,981,800/2 =  ­2,991,760 d) Would you want to purchase an insurance policy that costs $3000 and covers all accident costs? Justify. The calculatio...
View Full Document

This note was uploaded on 02/03/2014 for the course INSR 205 taught by Professor Kent/smetters/nini during the Spring '09 term at UPenn.

Ask a homework question - tutors are online