Session 5 Homework Solutions
Solution:
Expected
Deviation
Probability
Salary
Salary
Doctor
10%
$300,000
$30,000
$5,475,600,000
Zoo
90%
$40,000
$36,000
$608,400,000
$66,000
$6,084,000,000
$78,000
(Calculate the expected salary)
E(salary)
= 0.9($40,000) + (0.1) ($300,000)
$66,000
(Calculate the variance of the expected salary)
$6,084,000,000
(Calculate the standard deviation of the expected salary)
$78,000
(Err)² (P)
Variance (σ²)
Std Dev (σ)
σ²
salary
= 0.9($40,000 – $66,000)
2
+ (0.1) ($300,000 – $66,000)
2
=
σ
salary
=($6,084,000,000)· =
⁵
7.3
Expected returns:
You have chosen biology as your college major because you would like to be a medical doctor.
However, you find that the probability of being accepted into medical school is about 10 percent. If you are accepted
into medical school, then your starting salary when you graduate will be $300,000 per year. However, if you are not
accepted, then you would choose to work in a zoo, where you will earn $40,000 per year. Without considering the
additional educational years or the time value of money, what is your expected starting salary as well as the standard
deviation of that starting salary?
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Solution:
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 Spring '12
 SMITH
 Finance, Variance, Probability theory, Kate

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