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Analysis of Risk and Probability Distributions in Insurance and Inventory Management

A detailed analysis of risk and probability distributions in insurance and inventory management.

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    Analysis of Risk and Probability Distributions in Insurance and Inventory Management Buffalo is analyzing inventory risk from potential fires at its warehouse and considering two options: Option A, where all inventory is stored in one warehouse, and Option B, where the inventory is split into two warehouses. For both options, calculate the expected loss, variance, and standard deviation. Determine which option carries more risk using these metrics and explain the significance of the coefficient of variation in measuring this risk. Additionally, discuss how pooling both warehouses into a single insurance policy would affect the risk and premium, referencing the Law of Large Numbers. Word Count Requirement : 700 - 1000 words.

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    RMI 2101 SUGGEST ED ANSWERS TO HOMEWORK NUMBER FIVE NOT ONLY POSSIBLE METHODS — SEE ALSO COMMENTS ON YOUR HW PAPERS 1. CIVIL AIR PATROL. TWO REGIONS. PA — NE AND PA — SW. # of Accidents per airplane P of having this # of accidents 0 .6 0 1 .25 2 .10 3 .05 SUM = 1.00 A. RANDOM VARIABLE IS A VARIABLE WHOSE OUTOCME OR VALUE DEPENDS UPON SOME CHANCE EVENTS RANDOM VARIABE HERE IS THE EXPECTED # OF ACCIDENTS PER AIRPLANE PER YEAR . B. P OF HAVING THREE LOSSES = .05. THE SUM OF ALL OF THE POSSIBLE OUTCOMES FOR A DISCRETE EMPIRICAL PROBABILITY DISTRIBUTION MUST = 1.00. 1.00 - .95 (P OF A LOSS < 3) = .05 C. P* EXPECTED NUMBER OF AC CIDENTS PER AIRPLANE PER YEAR FO R THE N E = P*FREQUENCY = 0 (.6) + 1(.25) + 2 (.10) +3 (.05 ) = 0 + .25 + .20 + .15 = .60 P* = .60 NUMBER OF ACCIDENTS PER AIRPLANE PER YEAR IN THE NE REGION . UNIT OF MEASUREMENT IS THE FREQUENCY OF , OR # OF ACCIDENTS (PER AIRPLANE PER YEAR). D. 500 PLANES IN THE NE REGION. P* NUMBER OF ACCIDENTS FOR ALL PLANES IN THE NE REGION = 500 X .60 = 300

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