1.

He asked the secretary to prepare the payment, although Rob, the MBA student
advised that it is too expensive. Bruce dismissed Rob’s remarked and told himself,
“He is playing the devil’s advocate.” Was Rob right?

rain (mm) prob. indemnity

0-2 53% -
3-5 30% 500
6-10 15% 1000
11- 2% 3000
Expected value of Indemnity 360

The expected value (EV) is an anticipated value for a given investment.

In statistics and probability analysis, the EV is calculated by multiplying each of

the possible outcomes by the likelihood each outcome will occur and summing

all of those values. Expected Value of Indemnity uses by some investors in

choosing a scenario that most likely to give them a desired outcome.

In the case of Alta Tierra, the expected value of indemnity result is 360

using the data on the probability and indemnity. Rob is right that the action of

Bruce was expensive because the expected value of indemnity is less than the

cost of the insurance however, the risk of raining was really affect the activity of

Alta Tierra. The action taken by Bruce in buying an insurance to mitigate the risk

were somehow can help the company in obtaining the risk by recovering the

expenses incurred during the events.