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Homework answers / question archive / a rare painting valued at $250,000 has a 1% chance of being stolen in any given year

a rare painting valued at $250,000 has a 1% chance of being stolen in any given year

Finance

a rare painting valued at $250,000 has a 1% chance of being stolen in any given year. Assume that it is stolen, the insurance comp will pay the owner the full value of the painting. what is the min the ins comp should charge to insure the painting?

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Computation of Minimum Amount the insurance company should charge to insure this painting:

∑(X) = ∑xP(x) = 0

∑(X) = $250,000*1% - C*(1-1%) = 0

∑(X) = $2,500 - C*99%  = 0 

$2,500-0 = C*99%

$2,500/99% = C

C = $2,525.25

So, the minimum amount the insurance company should charge to insure the painting is $2,525.25.

 

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