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Tutorial 4
1.
(0.5p)
The risk of a portfolio of financial assets is sometimes called
investment risk
(Radcliffe, 1994). In general, investment risk is typically measured by computing the variance or
standard deviation of the probability distribution that describes the decision maker's potential
outcomes (gains or losses). The greater the variation in potential outcomes, the greater the
uncertainty faced by the decision maker; the smaller the variation in potential outcomes, the more
predictable the decision maker's gains or losses. The two discrete probability distributions given in
the table were developed from historical data. They describe the potential total physical damage
losses next year to the fleets of
delivery trucks of two different firms
.
FirmA
FirmB
Loss next year Probability Loss next year Probability
$ 0
.01
$ 0
.00
500
.01
200
.01
1,000
.01
700
.02
1,500
.02
1,200
.02
2,000
.35
1,700
.15
2,500
.30
2,200
.30
3,000
.25
2,700
.30
3,500
.02
3,200
.15
4,000
.01
3,700
.02
4,500
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This note was uploaded on 02/18/2012 for the course FIN 101 taught by Professor Write during the Spring '12 term at PWSZ w Gorzowie Wielkopolskim.
 Spring '12
 Write

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