You are a hotel manager, and are considering four projects that yield different payoffs, depending upon whether there is an economic boom or recession.The potential payoffs and corresponding payoffs are summarized in the following table.

-The variance in the returns of project D is

Question

You are a hotel manager, and are considering four projects that yield different payoffs, depending upon whether there is an economic boom or recession.The potential payoffs and corresponding payoffs are summarized in the following table.
 
-The variance in the returns of project D is

Quizplus · Accepted Answer

The variance can be calculated using the formula: 
Variance = (probability of economic boom) x (payoff in boom - expected payoff)^2 + (probability of recession) x (payoff in recession - expected payoff)^2

For project D, the expected payoff is (0.25 x 400) + (0.75 x 100) = 175. 
Then, the variance = (0.25 x (400 - 175)^2) + (0.75 x (100 - 175)^2) = 225.

Therefore, project D has the highest variance, indicating higher risk compared to other projects. The best choice would be to choose project A or B, as they have the highest expected payoffs in both boom and recession scenarios.

You Are a Hotel Manager, and Are Considering Four Projects