Question

Suppose that a firm expects profits of $2 million under Scenario A (probability of 35%), profits of $3.4 million under Scenario B (probability of 25%), and profits of $2.8 million (probability of 40%) under Scenario C. Calculate the following measures. Show your calculations.

• Expected Value
• Variance
• Standard Deviation

Answer 1

	Probability (P)	RETURN (Y)	(P * Y )	P * (Y -Average Return of Y)^2
SCENARIO A	35%	2	0.70	0.1571
SCENARIO B	25%	3.4	0.85	0.1332
SCENARIO C	40%	2.8	1.12	0.0068
		TOTAL	2.67	0.2971
Expected Return =		(P * Y)
		2.67
VARIANCE =		P * (Y -Average Return of Y)^2
		0.2971
Standard Deviation =		Square root of (P * (Y -Average Return of Y)^2)
		Square root of 0.2971
		0.55