Welcome to the hotseat. We've prepared a guide if you'd like to read more about how it works.

Variance(endowment) < [variance(pure endowment)+variance(term assurance)

0 votes
asked Jun 24 in BUS 3018F - Models by anonymous

I have proven that Variance(endowment) < [variance(pure endowment)+variance(term assurance)] mathematicallyrics. I would like to know why this is true intuitively : question 1.19

1 Answer

0 votes
answered Jun 26 by Njabulo.Dube (1,290 points)
Best answer
One way to look at this is to consider the sources of 'uncertainty' that each product essentially exhibits.

For the pure endowment, there is uncertainty as to whether a payment will have to be made at the end of the period.

For the term assurance, the uncertainty is the timing of the payment (provided the life dies before the end of the term); and whether a payment will actually occur.

Whereas for the endowment, the only uncertainty is the timing of the benefit, not whether a benefit will be paid.

Uncertainty(endowment) = timing

Uncertainty(pure endowment) = amount

Uncertainty (term assurance) = amount and timing

So if you add the 'uncertainty' components, you will get the uncertainty of the endowment should be lower than the uncertainty of the pure endowment and term assurance, i.e.