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Big Cure and Little Cure are both pharmaceutical companies.Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA)waiting for approval.If approved,Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure.Little Cure has 10 separate less important drugs before the FDA waiting for approval.If approved,each of Little Cure's drugs would produce $100 million in net income for Little Cure.The probability of the FDA approving a drug is 50%.
-What is the standard deviation of Big Cure's average net income for their new blockbuster drug?
A)$0
B)$1 billion
C)$100 million
D)$500 million

Question

Quizplus · Accepted Answer

The standard deviation of Big Cure's net income is calculated as the square root of the variance. The variance is the sum of the squared differences between the possible outcomes and the expected value, weighted by their probabilities. Since there are only two possible outcomes for Big Cure (approval or denial) and the net income for approval is fixed at $1 billion, the variance is ($1 billion - $1 billion)^2*(0.5)+(0-$1 billion)^2*(0.5) = $500 million^2. The standard deviation is therefore the square root of $500 million^2, which is $500 million.

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