The range is calculated as the difference between the

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Unformatted text preview: utcomes of the probability distribution are. The range is calculated as the difference between the best and the worst possible outcomes: Range = Best possible outcome - Worst possible outcome For Product A, the range of possible outcomes is $10,000 - (-$1,000) = $11,000. The larger the range, the farther apart are the two extreme possible outcomes and therefore more risk. The standard deviation Though easy to calculate, the range doesn't tell us anything about the likelihood of the possible cash flows at or between the extremes. In financial decision-making, we are interested in not just the extreme outcomes, but all the possible outcomes. One way to characterize the dispersion of all possible future outcomes is to look at how the outcomes differ from one another. This would require looking at the differences between all possible outcomes and trying to summarize these differences in a usable measure. An alternative to this is to look at how each possible future outcome differs from a single value, comparing...
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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.

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