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Unformatted text preview: 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 .01 4,200 .02 5,000 .01 4,700 .01 a. Verify that both firms have the same expected total physical damage loss. b. Compute the standard deviation of each probability distribution, and determine which firm faces the greater risk of physical damage to its fleet next year....
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This note was uploaded on 03/11/2012 for the course FIN FIN 3230 taught by Professor Petrivanov during the Spring '12 term at Kazakhstan Institute of Management, Economics and Strategic Research.
 Spring '12
 PetrIvanov
 Finance

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