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Unformatted text preview: ession Probability $10,000 20% or 0.20
5,000 50% or 0.50
-1,000 30% or 0.30 Looking at this table we can see there is more than one possible outcome. There are three possible
outcomes, each representing a possible cash flow, and its probability of occurring.
Looking at this probability distribution, we see that there is some chance of getting a -$1,000 cash flow
and some chance of getting a +$10,000 cash flow, though the most likely possibility (the one with the
greatest probability) is a +$5,000 cash flow.
But to get an idea of Product A's risk, we need to know a bit more. The more spread out the possible
outcomes, the greater the degree of uncertainty (the risk) of what is expected in the future. We refer to
the degree to which future outcomes are "spread out" as dispersion. In general, the greater the
dispersion, the greater the risk. There are several measures we could use to describe the dispersion of
future outcomes. We will focus on the range, the standard deviation, and the coefficient of variation. The range
The range is a statistical measure representing how far apart the two extreme o...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at Arizona.
- Spring '07