Problem 1. Two investments have the following expected returns (net present values) and standard deviation of returns:
Project Expected Returns Standard Deviation
A $50,000 $40,000
B $250,000 $125,000
Which one is riskier? Why?
Problem 2. The manager of the Aerospace division of General Aeronautics has estimated the price can change for providing satellite launch services to commercial firms. Her most optimistic estimate (a price not expected to be exceeded more than 10 percent of the time) is $2 million. Her most pessimistic estimate (a lower price than this one is not expected more than 10 percent of the time) is $1 million. The expected value estimate is $1.5 million. The price distribution is believed to be approximately normal.
a. What is the expected price?
b. What is the standard deviation of the launch price?
c. What is the probability of receiving a price less than 1.2 million?