State Farm receives a one-year hurricane insurance premium today of $1,750 from a family in Florida. If there is a hurricane this season and the family's home is damaged, this insurance policy will pay for all the repairs. Their home is valued at $250,000. Repairs would cost on average a quarter of home value ($62,500 in this case). Assume repairs (if any) would be paid one year from today. There is a 1% chance of hurricane damage in any given year. If the required rate of return for State Farm is 5%, how does writing this policy change State Farm's wealth?
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- Please refer to the attachment to answer this question. This question was created from Quiz 8.