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Unformatted text preview: n by first calculating the expected outcome, E(x). In our
example, there are three possible outcomes, so N = 3. Adding the probability-weighted outcome of each
of these three outcomes results in the expected cash flow: E(Cash flow for Product A) = (0.20) $10,000 + (0.50) $5,000 + (0.30)-$1,000
E (Cash flow for Product A) = $2,000 + $2,500 - $300
E (Cash flow for Product A) = $4,200
The calculations for the standard deviation are provided in Exhibit 1. The standard deviation is a
statistical measure of dispersion of the possible outcomes about the expected outcome. The larger the
standard deviation, the greater the dispersion and, hence, the greater the risk.
Exhibit 1: Calculation of expected return and standard deviation for Product A Economic
Cash flow times
conditions Cash Flow Probability
Recession $10,000 20% $ 2,000 5,000 50% 2,500 -1,000 30% (300) Deviation Squared
deviation Weighted squared
deviation 5,800 33,640,000
800 6,728,000 640,000 320,000 -5,200 27,040,000 9,112,000 E(x) = $4,200 σ2 = 15,160,000
σ = $3,893.58 The coefficient of variation
The standard devi...
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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 University of Arizona- Tucson.
- Spring '07