Describing Risk Expected value(Ev) ■ An Example EV=Pr(success)($40/share)+Pr(failure )($20/share) EV=14($40 share)+3/4($20/ share) E∨=$25/ share Chapter 5 Slide 11
Chapter 5 Slide 11 Describing Risk ◼ An Example: EV =Pr(success)($40/share)+Pr(failure)($20/share) EV =1 4($40/share)+3 4($20/share) EV = $25/share Expected Value (EV)
Describing Risk ■ Given o Two possible outcomes having payoffS X1 and X2 o Probabilities of each outcome is given by Pr,& Pr? Chapter 5 Slide 12
Chapter 5 Slide 12 Describing Risk ◼ Given: ⚫ Two possible outcomes having payoffs X1 and X2 ⚫ Probabilities of each outcome is given by Pr1 & Pr2
Describing Risk a Generally, expected value is written as E(X)=PIX+Pr,X,+.+Pr X n n Chapter 5 Slide 13
Chapter 5 Slide 13 Describing Risk ◼ Generally, expected value is written as: 1 1 2 2 Prn Xn E(X) = Pr X + Pr X + ... +
Describing Risk a Variability o The extent to which possible outcomes of an uncertain even may differ Chapter 5 Slide 14
Chapter 5 Slide 14 Describing Risk ◼ Variability ⚫ The extent to which possible outcomes of an uncertain even may differ
Describing Risk Variability ■ A Scenario o Suppose you are choosing between two part-time sales jobs that have the same expected income($1, 500) o The first job is based entirely on commission o The second is a salaried position Chapter 5 Slide 15
Chapter 5 Slide 15 Describing Risk ◼ A Scenario ⚫ Suppose you are choosing between two part-time sales jobs that have the same expected income ($1,500) ⚫ The first job is based entirely on commission. ⚫ The second is a salaried position. Variability