Question

Your firm is considering three mutually exclusive projects. All three projects entail some degree of risk. The probability distribution of the possible outcomes for the three projects (A, B, and C) are given below.

Project A

ProbabilityProfit ($ millions)

0.1-2

0.20

0.42

0.24

0.18

Project B

ProbabilityProfit ($ millions)

0.3-2

0.150

0.12

0.154

0.38

Project C

ProbabilityProfit ($ millions)

0.2-5

0.20

0.21

0.25

0.210

Calculate the following:

1. Project A's expected value.

2. Project A's standard deviation.

3. Project A's coefficient of variation

4. Project B's expected value.

5. Project B's standard deviation.

6. Project B's coefficient of variation

7. Project C's expected value.

8. Project C's standard deviation.

9. Project C's coefficient of variation

10. If you were risk neutral, which project should be selected?

11. If you were risk averse, which project should be ruled out?

Now assume the three projects are not mutually exclusive and their outcomes are independent. Your firm is considering undertaking all three. For the three projects in aggregate:

12. Calculate the expected value.

13. Calculate the standard deviation.

14. Calculate the coefficient of variation.