Question

Two friends, Rosa and Jef, have the same loss distribution: Loss = $0 with probability .75...

Two friends, Rosa and Jef, have the same loss distribution:

Loss = $0 with probability .75

Loss = $10 with probability .25

Find the expected loss and standard deviation for the distribution. (2 points)

Now, Rosa and Jef agree to pool losses. This means that if there is a loss to either one of them then they will split all losses in the pool equally. Show the new probability distribution.

What has happened to the extreme outcomes? (1 point)

Find expected loss and standard deviation for each person with pooling. (2 points)

Why are Rosa and Jef better off with pooling? (1 point)

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