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I am confused on how to set up the equation to find the answer. Please help.
Find the expected value.
A trip insurance policy pays $1000 to the customer in case of a loss due to theft
or damage on a four-day trip. If the risk of such a loss is assessed to be 1 in 250,
what is a fair premium (the company's expected cost per customer) for this policy?
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My background is not from Finance, but I have a common sense, instead.
The loss happens in one case from 250.
Then the company pays $1000 to the customer.
In other words, it pays = 4 dollars to each customer, in average.
These 4 dollars is the answer to the problem's question.
The equation to setup is 4 = .
is the probability of the loss.
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"Fair premium" in this case means that the company works at no profit and without processing fees
and without paying salary to its coworkers, i.e. on a voluntary basis . . . (exactly as the tutors at this forum . . . )
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To get the knowledge on the subject "Expected value", read from these Internet sources
https://en.wikipedia.org/wiki/Expected_value
https://www.investopedia.com/terms/e/expected-value.asp