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Hi,
I don’t understand what the following sentence from one of the answers in the KAPLAN exam book means:
Expected values do not take into account the variability which could occur across a range of outcomes. What do they mean by variability.
How does that affect an expected value?
The expected value provides an average or anticipated outcome, but it does not capture the full picture of the potential outcomes and their probabilities.
It does not consider the dispersion or variability of these outcomes, which can be important in decision-making and risk assessment.
So, expected values alone may not fully account for the potential risks and uncertainties associated with a decision or investment. It is important to consider additional measures of variability, such as standard deviation, to gain a more comprehensive understanding of the potential outcomes and their likelihoods.
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