2023/4/16 12:33 2 of 2 - Assignment - Practice

2 of 2 Finish Assignment

0 - 19 5,000
20+ 2,000

i = 0.05
IV.

Calculate Var[Z].

16% A 285,700

45% B 285,900

286,100
22%

12% D 286,300

Exhibit

Solution

Written Solution
The variance of Z is:
Var[Z] = E[Z2] − (E[Z])2
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 Z is:
2023/4/16 12:33 2 of 2 - Assignment - Practice

Z = 5,000vK45+1 , K45 < 20

2,000vK45+1 , K45 ≥ 20
{

The expected value of Z is:

E[Z] = 5,000A145: 20 + 2,00020E45A65
= 5,000 A45: 20 − 20E45 + 2,00020E45A65
( )

= 5,000 (0.38385 − 0.35994) + 2,000(0.35994)(0.35477)

= 374.9418
Z2 is:
2v2(K45+1) , K45 < 20
Z2 = 5,000
2,0002v2(K45+1) , K45 ≥ 20
{

The expected value of Z2 is:

E[Z2] = 5,0002 ⋅ 2A145: 20 + 2,0002 ⋅ 220E452A65
= 5,0002 2A45 − 220E452A65 + 2,0002 ⋅ 220E452A65
= 5,0002 ⋅ 2A45 − (5,0002 − 2,0002)220E452A65
( )

= 5,0002 ⋅ 0.03463 − (5,0002 − 2,0002)(v20(0.35994))(0.15420)

= 426,463.5582
Finally, the variance is:

Var[Z] = 426,463.5582 − 374.94182 = 285,882

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