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-   -   Standard Deviation and E(R) (https://www.askmehelpdesk.com/showthread.php?t=381378)

  • Jul 29, 2009, 08:18 PM
    mary_2009
    Standard Deviation and E(R)
    Hello all,

    I need serious help with the following problem:

    Cineplex Inc is considering two mutually exclusive projects - Cable and Satellite. The Possible NPVs for each project and their associated probabilities are as follows:

    Cable: Satellite:

    NPV ($000) PROBABILITY NPV($000) PROBABILITY

    10 10% 15 60%
    20 50% 20 20%
    25 40% 40 20%

    Calculate the standard deviation for each project. Which project has the higher level of risk?


    Question: How am I supposed to calculate the E(R) from the NPV'S?
    Help...
  • Jul 30, 2009, 04:45 AM
    ArcSine
    The E(R) for each project is just the weighted-average NPV for each, where the 'weights' are the probabilities associated with each outcome.

    Simple example: I think there's a 75% chance that my business will have a profit next year of $100, and a 25% chance it'll make $130.

    Using the lingo spoken in Probability-ville, my expected profit--or E(Profit)--is $107.50, which was figured this way:

    (0.75 x 100) + (0.25 x 130) = $107.50.

    Does that help a bit?

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