INVESTMENT ANALYSIS Paul Hunt is considering two business ventures. Th

Madeline Lott

Madeline Lott

Answered question

2021-12-10

INVESTMENT ANALYSIS Paul Hunt is considering two business ventures. The anticipated returns (in thousands of dollars) of each venture are described by the following probability distributions:
Venture AEarningsProbability203504503
Venture BEarningsProbability152305403
a. Compute the mean and variance for each venture.
b. Which investment would provide Paul with the higher expected return (the greater mean)?
c. In which investment would the element of risk be less (that is, which probability distribution has the smaller variance)?

Answer & Explanation

Bertha Jordan

Bertha Jordan

Beginner2021-12-11Added 37 answers

Given
Venture A
EarningsProbability200.3400.4500.3
Venture B
EarningsProbability150.23005400.3
For Venture A
Mean (E(x))=X.P(x)
E(x)=(20×0.3)+(40×0.4)+(50×0.3)
E(x)=6+16+15
E(x)=25
Ε(x2)=x2.P(x)
E(x2)=(202×0.3)+(402×0.4)+(502×0.3)
E(x2)=120+640+750
E(x2)=1510
Variance (V(x))=E(x2)(E(x))2
V(x)=1510(25)2
V(x)=1510-625
V(x)=885
For Venture B
Mean (E(x))=X.P(x)
E(x)=(15×0.2)+(30×0.5)+(40×0.3)
E(x)=3+15+12
E(x)=24
E(x2)=x2.P(x)
E(x2)=(152×0.3)+(302×0.4)+(402×0.3)
E(x2)=45+360+480
E(x2)=885
Variance (V(x))=E(x2)(E(x))2
zurilomk4

zurilomk4

Beginner2021-12-12Added 35 answers

b)
Venture A investment would provide Paul with the higher expected return

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