Consider the situation of an insurance company which offers

Consider the situation of an insurance company which offers personal injury policies to professional hockey players. The typical payoffs to one of these policies are forecast to be the following:

State

Prob.

Payoff

Athlete is seriously injured

0.01

-5,000,000

Athlete is not injured seriously

0.99

60,000

What is the expected profit per policy? Assuming the returns are uncorrelated policy to policy, how many policies must be sold in order for the standard deviation of the firm\'s overall portfolio of injury policies to be below $10,000?

Can someone help and show me how its done? Thank you so much.

Solution