Risk Management
Autor: Phuogdug • March 6, 2018 • Coursework • 463 Words (2 Pages) • 386 Views
Dung Nguyen
UCID: M12382181
HOMEWORK 2
Question 1:
i.
State | Cash Flow | Probability | CF*Prob | Deviation | Sqr. Dev | Sqr. Dev * Prob |
No Loss | $3,000,000 | 0.96 | $2,880,000 | $73,000 | $5,329,000,000 | $5,115,840,000 |
State 1 | $1,500,000 | 0.026 | $39,000 | -$1,427,000 | $2,036,329,000,000 | $52,944,554,000 |
State 2 | $800,000 | 0.01 | $8,000 | -$2,127,000 | $4,524,129,000,000 | $45,241,290,000 |
State 3 | $0 | 0.004 | $0 | -$2,927,000 | $8,567,329,000,000 | $34,269,316,000 |
|
| Expected value | $2,927,000 |
| Variance | $137,571,000,000 |
|
|
|
|
| SD | $370,905.65 |
ii.
State | Cash Flow | Probability |
No Loss | 3000000 - P | 0.96 |
State 1 | 3000000 - P | 0.026 |
State 2 | 3000000 - P | 0.01 |
State 3 | 3000000 - P | 0.004 |
iii.
State | Insurer's cost | Probability |
No Loss | $0 | 0.96 |
State 1 | $1,500,000 | 0.026 |
State 2 | $2,200,000 | 0.01 |
State 3 | $3,000,000 | 0.004 |
iv.
State | Cash Flow | Loss distribution | Probability | Loss*Prob |
No Loss | $3,000,000 | 0 | 0.96 | 0 |
State 1 | $1,500,000 | $1,500,000 | 0.026 | 39,000 |
State 2 | $800,000 | $2,200,000 | 0.01 | 22,000 |
State 3 | $0 | $3,000,000 | 0.004 | 12,000 |
|
|
| E(Loss) | $73,000 |
|
|
| Price | $100,000 |
|
|
| Loading | $27,000 |
v.
State | Cash Flow | Probability |
No Loss | $2,900,000 | 0.96 |
State 1 | $2,900,000 | 0.026 |
State 2 | $2,900,000 | 0.01 |
State 3 | $2,900,000 | 0.004 |
- Expected CF= $2,900,000, SD= 0
Question 2
The cost of capital = 8% => r= 0.08
Price of the Skipper Inc’s stock= [pic 1]
Question 3:
a/
| Year 1 | Year 2 | Prob |
Revenue | 100 | 100 |
|
Cost w/o injured | 79 | 79 | 0.9 |
Cost if injured | 85 | 85 | 0.1 |
E (cost) | 80 | 80 |
|
ECF | 20 | 20 |
|
b/ Price of the Skipper Inc’s stock= [pic 2]
c/ The risk of work injury is firm- specific risk, while the cost of capital depends on the systematic risk so that the cost of capital should not change because of the injury risk.
Question 4:
| Year 1 | Year 2 |
Revenue | 100.000 | 100.000 |
Cost | 79.445 | 79.445 |
Premium | 0.555 | 0.555 |
CF | 20.000 | 20.000 |
Stock Price | 18.519 | 17.147 |
Sum |
| 35.665 |
...