Question

Consider the following information: Project Boom (50%) Recession (50%) A $20 -$10 B -$10 $20 C $30 $-30 D $50 $50

What is the expected value and variance of project A.

Answer 1

The following table is required for expected value (E) and variance (V).

Project A

	X	F	E = X × F	X^2	FX^2
Boom	20	0.5	10	20^2 = 400	0.5 × 400 = 200
Recession	-10	0.5	-5	-10^2 = 100	0.5 × 100 = 50
Total		1	5		250

Answer: the expected value is $5.

Variance = (FX^2 / F) – E^2

               = (250 / 1) – 5^2

               = 250 – 25

               = $225 (Answer)