A firm is considering two business projects. Project A will return a loss of $45 if conditions are poor, a profit of $35 if conditions are good, and a profit of $155 if conditions are excellent. Project B will return a loss of $100 if conditions are poor, a profit of $60 if conditions are good, and a profit of $300 if conditions are excellent. The probability distribution of conditions follows:
(i) Calculate the expected value of each project and identify the preferred project according to this criterion.
(ii) Calculate the standard deviation of each project and identify the project that has the higher level of risk.
(iii) Calculate the coefficient of variation for each project and identify the preferred project according to this criterion.

Question

A firm is considering two business projects. Project A will return a loss of $45 if conditions are poor, a profit of $35 if conditions are good, and a profit of $155 if conditions are excellent. Project B will return a loss of $100 if conditions are poor, a profit of $60 if conditions are good, and a profit of $300 if conditions are excellent. The probability distribution of conditions follows:
  (i) Calculate the expected value of each project and identify the preferred project according to this criterion.
(ii) Calculate the standard deviation of each project and identify the project that has the higher level of risk.
(iii) Calculate the coefficient of variation for each project and identify the preferred project according to this criterion.

Quizplus · Accepted Answer

The Answer of A firm is considering two business projects. Project A will return a loss of $45 if conditions are poor, a profit of $35 if conditions are good, and a profit of $155 if conditions are excellent. Project B will return a loss of $100 if conditions are poor, a profit of $60 if conditions are good, and a profit of $300 if conditions are excellent. The probability distribution of conditions follows:
  (i) Calculate the expected value of each project and identify the preferred project according to this criterion.
(ii) Calculate the standard deviation of each project and identify the project that has the higher level of risk.
(iii) Calculate the coefficient of variation for each project and identify the preferred project according to this criterion.

A Firm Is Considering Two Business Projects