Describing Risk Variability Adjusting for negative numbers a The standard deviation measures the square root of the average of the squares of the deviations of the payoffs associated with each outcome from their expected value Chapter 5 Slide 21
Chapter 5 Slide 21 ◼ Adjusting for negative numbers ◼ The standard deviation measures the square root of the average of the squares of the deviations of the payoffs associated with each outcome from their expected value. Variability Describing Risk
Describing Risk Variability a The standard deviation is written Pr E(X)2」+P2X2-E(X) Chapter 5 Slide 22
Chapter 5 Slide 22 Describing Risk ◼ The standard deviation is written: 2 2 2 2 1 1 = Pr X − E(X ) + Pr X − E(X ) Variability
Describing Risk Calculating Variance(s) Deviation Deviation Deviation Standard Outcome 1 Squared outcome 2 squared squared deviation Job1$2,000$250,000$1,000$250,000$250,000$500.00 Job21510 100 510 980.100 9,9009950 Chapter 5 Slide 23
Chapter 5 Slide 23 Calculating Variance ($) Job 1 $2,000 $250,000 $1,000 $250,000 $250,000 $500.00 Job 2 1,510 100 510 980,100 9,900 99.50 Deviation Deviation Deviation Standard Outcome 1 Squared Outcome 2 Squared Squared Deviation Describing Risk
Describing Risk a The standard deviations of the two jobs are 5($250,000+5($250,000 G1=√$25000 0,=500*Greater Risk a2=√,99100)+.01($980,100) $99O0 G2=99.50 Chapter 5 Slide 24
Chapter 5 Slide 24 Describing Risk ◼ The standard deviations of the two jobs are: 99.50 $9,900 .99($100) .01($980,100) 500 $250,000 .5($250,000) .5($250,000 2 2 2 1 1 1 = = = + = = = + *Greater Risk
Describing Risk a The standard deviation can be used when there are many outcomes instead of only two Chapter 5 Slide 25
Chapter 5 Slide 25 Describing Risk ◼ The standard deviation can be used when there are many outcomes instead of only two