Question

Julie is operating a fruits shop in Toronto. She has purchased a fruits display coolers to store fresh fruits. She understands the risk of a financial loss if the coolers breakdown. She has identified two potential risks associated with these coolers that cause business risk and financial risk. The financial losses are stated below:

Probability of Loss – Business Risk	Possible Amount of Loss (USD)	Probability of Loss – Financial Risk	Possible Amount of Loss (USD)
0.4	0	0.5	40,000
0.5	46,000	0.5	20,000
0.1	70,000

1. You are required to assist Julie in estimate the possible losses arising due to business risk and financial risk caused by the faulty of the cooler.

2. Assess the potential risks of associated with these two probabilities losses.             

3. Base on the answers in (a) and (b), comment on why the standard deviation is different even when both distributions are having the same losses.

Answer 1

Part c

The reason for different standard deviation despite same possible losses is due to the difference in probabilities associated with both the kinds of losses.