XYL Insurance Corp. estimates that its assets, which are currently worth $1,000
ID: 2631685 • Letter: X
Question
XYL Insurance Corp. estimates that its assets, which are currently worth $1,000 million, will earn a return at the end of the year that is normally distributed with an expected value of 0.05 and a standard deviation of 0.06. It estimates that its liabilities from policies at the end of the year will be normally distributed with an expected value of $850 million and a standard deviation of $50 million. The correlation between asset returns and liabilities equals zero. Is XYL's probability of insolvency greater than or less than 0.01? Redo question 1 assuming the correlation coefficient between the asset return and liabilities equals 0.1. No calculations are necessary. Explain your reasoning
Explanation / Answer
SOLUTION:
To become insolvent, return must be in negative and liabilities must be grown so high so as not covered by assets available.
Probability of this situation will be less than 0.01
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