Page 43 - EBOOK RISK MANAGEMENT

Table 4.3 Example Expected Value of Loss Using Frequency of Distribution

Claim Amount (x) No. of claims (f) fx
500 4 2,000
600 2 1,200

700 3 2,100
800 6 4,800
[] = 2,600 15 10,100

[] = ∑
∑

= 10,100
15

= 673.33

4.3.4 Variance and Standard Deviation

Variance is a measure of the spread of outcomes around the expected value. A
low variance means that the actual outcome is close to expected value. A

variance with high value is less predictable and less certain. Low variance shows
low risk while a high variance shows high risk. The standard deviation formula is

the square root of the variance. In order to calculate standard deviation, one

must calculate the variance first.

Given that formula for variance and standard deviation as:

Variance, = ∑( − )²

Σf(x-)²
2
2
Standard Deviation, = ∑ - ∑ ²
N
Or ∑ ∑
Where,

x = value of each possible loss

= expected value or average of all possible loss
f = frequency of loss

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