An Insurance Company Estimates That It Should Make an Annual

question 48

Multiple Choice

An insurance company estimates that it should make an annual profit of $140 on each homeowner's policy written,with a standard deviation of $5500.If it writes 10,000 of these policies,what are the mean and standard deviation of the annual profit? Assume that policies are independent of each other.

• A)μ = $14,000.00,σ = $550,000.00
• B)μ = $1,400,000,σ = $550,000,000,000
• C)μ = $1,400,000,σ = $550,000.00
• D)μ = $1,400,000,σ = $55,000,000
• E)μ = $14,000.00,σ = $55,000,000

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Definitions:

Financial Break-even Point

The level of revenue necessary to cover all operating and financial costs, including interest and principal payments, yielding a net income of zero.

Discounted Payback Period

The amount of time it takes for an investment to generate enough cash flows to recover the initial outlay, with the cash flows discounted to account for the time value of money.

Forecasting Risk

The potential deviation of outcomes from predicted results in financial projections, due to uncertainties in the market or inaccurate assumptions.

Projected Cash Flows

Estimates of the amount of money expected to be received and paid out by a business over a future period.