Jenny owns a home in a heavily wooded area. If there is a 1-in-25 chance of fire in the area, what is her expected loss given the following possible outcomes:
.Minor smoke damage: cost = $5,000, probability= 50%
.Exterior fire damage: cost = $15,000, probability= 30%
.Everything ruined: cost = $150,000, probability = 5%

Question

Quizplus · Accepted Answer

The expected loss is calculated by multiplying each outcome's cost by its probability and summing these products. The probability of fire is 1/25 or 0.04. The expected loss is 0.04 * (0.5 * $5,000 + 0.3 * $15,000 + 0.05 * $150,000) = $580.

Jenny Owns a Home in a Heavily Wooded Area