Pooling or risks

Question 1

Explain using a dice metaphor risk pooling

Answer 1

If you throw a dice once you have an even chance of getting an expectancy-value between 1 and 6, if you throw it twice you have the same expectancy-value, but the chance of you getting this is much higher and the chance of you getting an extreme value is further reduced because

Question 2

What type of risks does risk pooling work with?

Answer 2

Non-Correlated independent random variables

Question 3

Central limits theorem

Answer 3

As we combine values we have a higher probability of getting to getting the expectancy-value

Question 4

What are the steps in pooling risks

Answer 4

1. Find the probabilities of each individual event
2. Multiply the combined value of the two events by both probabilities
3. Combine any duplicates by adding
4. Arrange the table by size