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...
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 Spring '09
 KENT/SMETTERS/NINI
 1%, 3k, 2k, AirTrain Newark, $3000, the00

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