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Hello Tutor,
Could you kindly explain this statement please?
”The EV gives no indication of the dispersion of possible outcomes about the EV, i.e. the risk.”
Thank you.
Situation 1. Outcome 1 = 5000 and p = 0.5; outcome 2 = 6000 and p = 0.5. EV = 5500
Situation 2. Outcome 1 = 1000 and p = 0.5; outcome 2 = 10000 and p = 0.5. EV = 5500
Both projects have the same expected income. But….
If the project cost 4000 in situation 1 there is no prospect of a loss, so no serious risk (lowest income = 5000).
In situation 2, however there is an evens chance of making a loss of 4000 – 1000 = 3000.
Therefore a serious risk (perhaps fatal) of losing 3000.
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