Question

Insurance companies A and B each earn an annual profit that is normally distributed with the same positive mean. The standard deviation of company A’s annual profit is one half of its mean. In a given year, the probability that company B has a loss (negative profit) is 0.9 times the probability that company A has a loss.Calculate the ratio of the standard deviation of company B’s annual profit to the standard deviation of company A’s annual profit.(A) 0.49(B) 0.90(C) 0.98(D) 1.11(E) 1.71

Answer 1

Answer:

C. 0.98

Step-by-step explanation:

Let x be the mean of Company A and B annual profit and x/2 and y are standard deviation of Company A and B annual profit.

P(B<0) = 0.9*P(A<0)

P(Z<(0-x)/y) = 0.9*P(Z<(0-x)/(x/2))

P(Z<-x/y) = 0.9*P(Z<-2)

P(Z<-x/y) = 0.0205

x/y =2.04

Or y/x = 1 /2.05

y/x =0.49

Ratio of the standard deviation of company B annual profit to the standard deviation of company A annual profit =y/(x/2)

= 2*(y/x)

= 2*0.49

= 0.98