Consider a firm that has $8 in inventory. They are consider…
Consider a firm that has $8 in inventory. They are considering two options with respect to the storage of this inventory. Option A would have them store the entire inventory in one warehouse. If it stores its inventory in a single warehouse, they are exposed to the risk of fire. Assume that there is a 50% chance of a fire occurring, which would destroy their entire inventory. Assume also that there is a 50% chance of having no fire. What is the expected loss for option A? Derive the amount of risk (C.O.V) associated with option A. (Please round your answer to two decimal place) Option B would have them split their entire inventory evenly across two warehouses; in other words, they would store $4 inventory in each warehouse. Assume now that each warehouse individually faces the same probability distribution for severity . What is the expected loss for option B? Derive the amount of risk (C.O.V) associated with option B. (Please round your answer to two decimal place)