Problem
Consider the following probability distribution of returns estimated for a proposed project that involves a new ultrasound machine:
|
State of the
|
Probability
|
Rate of
|
|
economy
|
of occurrence
|
return
|
|
Very poor
|
0.1
|
-10.0%
|
|
Poor
|
0.2
|
0.0%
|
|
Average
|
0.4
|
10.0%
|
|
Good
|
0.2
|
20.0%
|
|
Very good
|
0.1
|
30.0%
|
1) What is the expected rate of return on the project?
2) What is the project's standard deviation of returns?
3) What is the project's coefficient of variation (CV) of returns?
4) What type of risk does the standard deviation and CV measure?
5) In what situation is this risk relevant?