Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below:
The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the deviation of outcome A?

Question

Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below:
  The expected value of the investment is $25. Although all the information is correct, information is missing.
-Refer to Scenario 5.4. What is the deviation of outcome A?

Quizplus · Accepted Answer

To calculate the deviation of Outcome A, we need to subtract the expected value from the payoff of Outcome A and take its absolute value.

Deviation of Outcome A = |$20 - $25| = $5

The best choice depends on the individual's risk tolerance and investment goals. If they are risk-averse, they may choose Outcome B with a lower potential payoff but a higher probability of success. If they are more risk-tolerant, they may choose Outcome C with a higher potential payoff but a lower probability of success. It ultimately comes down to the individual's personal preferences and investment strategy.

Scenario 5.4: Suppose an Individual Is Considering an Investment in Which There