Question: Fire! An insurance company estimates that it should make an annual profit of $150 on each homeowner s policy written, with a standard deviation of $6000.
a) Why is the standard deviation so large?
b) If it writes only two of these policies, what are the mean and standard deviation of the annual profit?
c) If it writes 10,000 of these policies, what are the mean and standard deviation of the annual profit?
d) Do you think the company is likely to be profitable? Explain.
e) What assumptions underlie your analysis? Can you think of circumstances under which those assumptions might be violated? Explain.