A manager is attempting to assess the probability of a recession ending in the next six months, and its impact on expected profitability.The manager believes there is 75 percent chance the recession will end in six months and profits will return to $400 million.However, there is a 25 percent chance the recession will not end in six months resulting in a $5 million loss.The standard deviation of profits over the next six months is

Question

Quizplus · Accepted Answer

The expected profit is calculated as (0.75 * $400 million) + (0.25 * -$5 million) = $298.75 million. The variance is (0.75 * ($400 million - $298.75 million)^2) + (0.25 * (-$5 million - $298.75 million)^2) = $30,750 million. The standard deviation is the square root of the variance, which is approximately $175.37 million.

A Manager Is Attempting to Assess the Probability of a Recession