Question

Assume that two business owners own identical buildings valued at $800. There is a 20% chance that each building will be completely destroyed by a peril in any year. The loss to either building is an independent event. Assume that the owners do not pool their loss exposures. The expected loss for each owner is:

a) $160
b) $320
c) $640
d) $800

Answer 1

The expected loss for each building owner is calculated by multiplying the probability of the building being destroyed (20%) by the building's value ($800), resulting in an expected loss of $160.

Step-by-step explanation:

The question asks for the expected loss for each building owner, given there's a 20% chance of the building being completely destroyed and valued at $800. To calculate the expected loss, we multiply the value of the loss by the probability of the loss occurring.

In this case, the expected loss for each owner is 0.20 (probability of the peril) × $800 (value of the building) = $160. Therefore, the correct answer is (a) $160.