A project has a probability of 0.3 to generate a payoff of $15m, and 0.7 with payoff of $5m. A) What is the expected payoff of the project, its variance and standard deviation? B) if it takes an initial investment of $6m, what is the expected return of the project, its variance, and standard deviation? Ignore time value of money
Homework Answers
1.
Expected payoff=0.3*15+0.7*5=8.0
Variance=0.3*(15-8)^2+0.7*(5-8)^2=21
Standard deviation=sqrt(21)=4.58
2.
Expected return=0.3*(15/6-1)+0.7*(5/15-1)=-0.01667
Variance=0.3*(15/6-1-(-0.01667))^2+0.7*(5/15-1-(-0.01667))^2=0.98583
Standard deviation=sqrt(0.98583)=0.99289
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