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.
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Expected Values.
5y ago#1Situation 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.
Highly appreciate it, thank you so very much.
God bless you.
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