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Risk & Return (Chp. 7)02/24/2016°Risk Preferences:Risk Taker – The person that takes the riskier investment even though both gives you same expected returnRisk Indifferent – With same expected return, takes the smaller amount of riskRisk Adverse – Same expected return, doesn’t matter which one youtake°How can you measure risk?1) Probability Distributions – calculate the expected value (return) and standard deviation°°Builtrite is considering the following two mutually exclusive projects:Project A:°Belief Cash Flow Prob Weighted Average°Pessimistic 40 X .20 = 8°Most likely 45 .60 27°Optimistic 50 .20 10Expected return = 45°Project B:°Belief Cash Flow Prob Weighted Average°Pessimistic 0 X .20 = 0°Most likely 45 .60 27°Optimistic 110 .20 22°Expected return = 49°Which project should be picked? Project A°Which project has more variability (risk)? Project B is “riskier”°***We measure variability by the standard deviation °