Question

Hello this questions is in regards ti risk management insurance.

3.Consider the following two scenarios [Option A and Option B] Shepherd Company has total inventory of $46,000. Currently, Shepherd has this entire inventory stored in one warehouse. There is a 3 occurs, then Shepherd will lose their entire inventory. [Option A] % chance that a fire could occur. If this fire As an alternative to keeping their entire inventory in one warehouse, Shepherd is considering separating their inventory evenly into two different warehouses. Once again, there is a 3% chance that a fire could occur in each warehouse. If this fire occurs, then Shepherd would lose their entire inventory in that particular warehouse. [Option B] Read about this concept in Chapter 5 of your textbook under the heading "Separation" on pages 5.9 -5.12 in order to answer this question properly. First, consider Option A What is the probability of having zero dollars in losses? What is the probability of having $46,000 in losses? Derive the probability distribution for total dollar losses under Option A. Note that this question asks for total dollar losses, not number of losses. Hint: Think about the definition of a probability distribution and apply it in this case. [2 points] Now consider Option B. Derive the probability distribution for total dollar losses under Option B. Hint: In the case of Option B, you need to consider all the possible outcomes in terms of dollar amount of losses, recognizing that Shepherd now has two warehouses. Further hint: consider the rules of probability as discussed in class when you derive your probability distribution. [2 points] Compare the amount of risk Shepherd faces under Option A vs. Option B. Which option has more risk? Justify and demonstrate your answer. Recall our discussion in Topic 4 about how we measure risk. [4 points] C.

Answer 1

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