A firm is considering two projects, A and B , with the following probability dis

Question

A firm is considering two projects, A and B, with the following probability distributions for profit.

1. The expected value of project A (in $1,000s) is

a.            $60

b.            $65

c.            $70

d.            $75

e.            $80

2. The variance of project A is

a.            7.07

b.            50

c.            440

d.            4,000

e.            380

3. What is the expected value of project B (in $1,000s)?

a.            $60

b.            $65

c.            $70

d.            $75

e. $80

4. What is the variance of project B?

a.            10

b.            21

c.            165

d.            440

e.            515

5. A decision maker using the analysis of variance rule would

a.            choose project A.

b.            choose project A only if risk averse.

c.            choose project B.

d.            choose project B only if risk loving.

e.            not be able to make a decision using that rule.

Explanation / Answer

1.c. $70

2.b. 50

3.d. $75

4.c. 165

5.b. choose project A only if risk averse.

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