Exam MAS-I Practice Question 13
Study guide: Exam MAS-I
An insurer's portfolio is 8,000 coastal homes. Each home's annual loss has mean \mu and standard deviation \sigma = 10\mu, and any two coastal homes' losses have correlation 0.01. The portfolio's coefficient of variation (CV) of total annual loss is currently 1.006.
The insurer will add 2,000 more homes of the same kind, either on the same coast (correlation 0.01 with every coastal home) or inland (independent of every other home). Its criterion is the lower CV of total annual loss. Which is the best assessment?
- A) Either location: the CV falls to about 0.900 in both cases
- B) Either location: the CV falls to 0.100 in both cases
- C) Neither: adding homes raises the variance of total loss
- D) Coastal: its CV is 0.806 against 1.005 inland
- E) Inland: its CV is 0.806 against 1.005 coastal
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