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Scenario: Flood Area
Suppose you own a home that is estimated to be worth $250,000. You live in a flood plain; as a result, the probability that you will lose your home to a flood is 30%.
-(Scenario: Flood Area) Look at the scenario Flood Area. A flood may occur, causing you to lose your entire home. In this case, your expected loss resulting from the flood would be:
A) $250,000.
B) $75,000.
C) $15,000.
D) $100,000.

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Quizplus · Accepted Answer

The expected loss is the probability of the event multiplied by the cost of the event. In this case, the probability of losing the home to a flood is 30%, or 0.3, and the cost of losing the home is $250,000. Therefore, the expected loss is 0.3 * $250,000 = $75,000.

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