Managerial Economics and Strategy, 2/e

Chapter 14

1. 1.2 Assuming that the painting is not insured against fire, its expected value is $\left(0.2\times \$1,000\right)+\left(0.1\times \$0\right)+\left(0.7\times \$500\right)=\$550.$ [&(0.2|multi|\$1,000) |plus|&][&(0.1|multi|\$0)|+|(0.7|multi|\$500)|=|\$550.&]

2. 1.4 The expected value of the stock is $\left(0.25\times 400\right)+\left(0.75\times 200\right)=250.$ [&(0.25|multi|400) |plus|&][&(0.75|multi|200)|=|250.&] The variance is $0.25{\left(400-250\right)}^2+0.75{\left(200-250\right)}^2=0.25{\left(150\right)}^2+0.75{\left(-50\right)}^2=5,625+1,875=7,500.$ [&0.25(400|-|250)^{2}&][&|plus| *N*[-1%0]0.75(200*N*[-2%0]|-|*N*[-2%0]250)^{2}*N*[-1%0]|=|*N*[-1%0]0.25(150)^{2}*N*[-1%0]|+|*N*[-1%0]0.75(|minus|50)^{2}*N*[-1%0]|=|*N*[-1%0]5,625&][&|plus| 1,875|=|7,500.&] The standard deviation is 86.6.

3. 2.6