Profit ($1,000s) Project A Probability (%) Project B Probability (%) $ 20 40 60
ID: 3157170 • Letter: P
Question
Profit
($1,000s)
Project A
Probability (%)
Project B
Probability (%)
$ 20
40
60
80
100
10
15
50
15
10
10
15
25
40
10
The expected value of project A (in $1,000s) is__________
The variance of project A is_________.
What is the expected value of project B (in $1,000s)?
What is the variance of project B?
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.
Profit
($1,000s)
Project A
Probability (%)
Project B
Probability (%)
$ 20
40
60
80
100
10
15
50
15
10
10
15
25
40
10
Explanation / Answer
The expected value of project A, E(X)=summation xi*pi=20*0.1+40*0.15+60*0.5+80*0.15+100*0.10=$60
Varince, Var(X)=summation (xi-xbar)^2*pi=(20-60)^2*0.1+...+9100-60)^2*0.1=440
E(X), for project B=20*0.10+40*0.15+...+100*0.10=65
Var(X)=515
Choose project A only if risk averse (b), [lower varaince]
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