Distribution A has an expected value of $50 and a standard deviation of $100; distribution B...

Distribution A has an expected value of $50 and a standard deviation of $100; distribution B has an expected value of $75 and a standard deviation of $125. Ignoring preferences over risk, which is the better option?

1) A

2) B

3) They are the same

4) It is impossible to tell

Solutions

Expert Solution

Basically standard deviation in Distributions tell the voilatility of an distribution or how much is the chances that distribution can be up and down from it's mean value . In other words , standard deviation is a unit to measure the risk , higher standard deviation represents higher risk for the distribution and vice versa .

Here Distribution A has expected value of $ 50 , while standard deviation of $100 .

Distribution B has an expected value of $75 and a standard deviation of $125 .

Hence here Distribution B has higher standard deviation, hence it may be a risky model but it has a higher mean value . As it is mentioned in the model that Ignoring preferences over risk means that may be the person is risk lover person . Hence he/she will choose the value with higher return and did't take risk into account .

Hence Distribution B will be the better option .

Hence (B) part is a correct answer

Rahul Sunny answered 1 year ago

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