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I have to calculate probability that losses will be $ 160,000 or below, with the following data Annual Cost of losses probability 16,000 0.15 32,000 0.3 80,000 0.25 160,000 0.15 320,000 0.08 800,000 0.05 1,600,000 0.02

I have summed up the probabilities till they add upto 160,000 which is 0.7%(first three probabilities) but I am still unsure about the answer

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    Yeah, looks alright. – 2017-01-06
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    but wouldn't one probability cancel the affect of other.. I mean if loss of range $0 - 16000$ is 0.15 .. then wouldn't it mean if this happens others wont? – 2017-01-06
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    by that logic shouldn't I sum upto first 4 probabilities – 2017-01-06
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    How can I calculate $ expected loss per year ? ( buildup on the previous question ).. – 2017-01-06

1 Answers 1

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Your logic is right, but the wording says 160000 or below so you need to add up $$0.15 + 0.3 + 0.25 + 0.15 = 0.85$$ to get a probability of 85%.

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    How can I calculate $ expected loss per year ? ( buildup on the previous question ).. – 2017-01-06
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    By expected loss, they mean the average. You have a 15% probability of losing 16000, a 30% probability of losing 32000, etc. There's a formula for computing the mean as a weighted sum of this data. – 2017-01-06
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    can you please share the formula? – 2017-01-06
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    https://en.wikipedia.org/wiki/Expected_value#Univariate_discrete_random_variable.2C_finite_case – 2017-01-06
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    so the answer would simply be a sumproduct of all maximum losses that can happen against their probabilities... which in this case turn out to be 153600$ – 2017-01-06
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    too tired to check your math, but your verbal description looks right. – 2017-01-06