Question

Use the information for the question(s) below. Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has 10 separate less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income for Little Cure. The probability of the FDA approving a drug is 50%. The standard deviation of Little Cure's average net income for their ten new drugs is closest to:

$500 million

$25 million

$50 million

$16 million

Answer 1

It is given that each drug can generate $100 Million if it is approved by FDA.

Therefore, we need to first calculate expected net income or Expected Return

It is calculated using the following formula

Expected Return ( Based on future data ) = Return of all drug items x Probability

= ($100 Million x 10) x 0.50

= $500 Million

Standard Deviation can be calculated by using the following formula

= Under root of [Probability x (Given Return - Expected Return)^2]

= Under root of [0.50 x ( $1000 Million - $500 Million )^2]

= Under root of [0.50 x 250000]

= Under root of 125000

= $353.55 Million

Therefore, standard deviation of Little Cure's average net income is closest to $500 Million.

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