Unformatted text preview: late the expected return:
Possible outcome, xi Probability, pi 0.10
0.00
0.20 0.20
0.50
0.30 xi pi
0.02
0.00
0.16
E(x)=0.04 Then, calculate the variance
xi E (x) (xi E (x))2
0.14
0.04
0.16 0.0196
0.0016
0.0256 pi (xi E (x))2
0.00392
0.00080
0.00768 Risk can be expressed statistically in terms
of measures such as the range, the
standard deviation, and the coefficient of
variation. Now that we know how to
calculate and apply these statistical
measures, all we need are the probability
distributions of the project's future cash
flows so we can apply these statistical
tools to evaluate a project's risk.
Where do we get these probability
distributions? From research, judgment,
and experience. We can use sensitivity
analysis or simulation analysis to get an
idea of a project's possible future cash
flows and their risk.
Estimates of cash flows are based on
assumptions
about
the
economy,
competitors,
consumer
tastes
and
preferences, construction costs, and taxes,
among a host of other possible
assumptions. One...
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 Spring '07
 MEJIAS

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