An individual has to choose between investment A and investment B
tutor4helpyouAn individual has to choose between investment A and investment B. The individual estimates that the income from each investment are as given in the following table:
| Investment A |
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| Investment B |
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Income |
| Probability |
| Income |
| Probability |
$4,000 |
| 0.2 |
| $4,000 |
| 0.3 |
5,000 |
| 0.3 |
| 6,000 |
| 0.4 |
6,000 |
| 0.3 |
| 8,000 |
| 0.3 |
7,000 |
| 0.2 |
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(a)Using Excel’s statistic tools, calculate the standard deviation of the distribution of each investment. (b) Which of the two investments is more risky? (c) Which investment should the individual choose? Note: Use table 14-4 as reference.
Table 14 -4 | Calculation of the Standard Deviation of Profits for Project A and Project B | |||||||
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| Project A |
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Deviation (xi - x ̅) | Deviation Squared | Probability | Deviation Squared | |||||
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| (xi - x ̅)2 | ( Pi) | Times Probability | ||||
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| (xi - x ̅)2 *Pi | |||
$600 - %500 = $100 | $10,000 | 0.25 | $2,500 |
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500 - 500 = 0 | 0 | 0.5 | 0 |
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400 - 500 = -100 | 10,000 | 0.25 | 2,500 |
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| Variance = | $5,000 |
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| Project B |
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Deviation (xi - x ̅) | Deviation Squared | Probability | Deviation Squared | |||
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| (xi - x ̅)2 | ( Pi) | Times Probability | ||
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| (xi - x ̅)2 *Pi | |
$800 - $500 = $300 | $900,000 | 0.25 | $22,500 |
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500 - 500 = 0 | 0 | 0.5 | 0 |
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200 - 500 = -300 | 900,000 | 0.25 | 22,500 |
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| Variance = | $450,00 |
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11 years ago
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data.xlsx- solution.docx
