Coursework 2
Exercise CW2.1
Consider the following two 4-year investments, with same initial investment given in the spread-
sheet:
Investment A: In each year, the annual effective rate of return is a discrete random variable. The rates in each year are independent and identically distributed, and their probability distribution given in the spreadsheet.
Investment B: In year 1, the annual effective rate of return is a discreterandom variable. The probability distribution of the rate is given in the spreadsheet. Once the rate is chosen for the first year, it stays fixed for the next years.
Calculate the expected accumulated value and variance after 4 years under each investment.
In your report you should include the following:
• State the expected accumulated value and variance for each investment.
• Discuss which investment is safer and which one riskier, and why.
Exercise CW2.2
Consider the Bornhuetter-Ferguson method and the chain ladder method in the context of ’de- velopment claims in insurance’. Apply the two methods to the dataset given on the spreadsheet in order to find the reserve required in 2019. Note that figures are incremental claims in the past 5 years, and you should assume that 2014 claims have completely run off in 2019.
In your report you should state the reserve required for both methods.
