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

Login

0 votes

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.

- All categories
- BUS 1003H - Introduction to Financial Risk (43)
- BUS 2016H - Financial Mathematics (53)
- BUS 3018F - Models (69)
- BUS 3024S - Contingencies (61)
- BUS 4028F - Financial Economics (20)
- BUS 4027W - Actuarial Risk Management (46)
- BUS 4029H - Research Project (5)
- Mphil (1)
- Calculus and Pure Mathematics (3)
- Statistics (16)

...