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Measurements of Risk

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A game of chance offers the following odds and payoffs. Each play of the game costs $100, so the net profit per play is the payoff less $100. Probability .10, .50 and .40. Payoff is $500, 100 and 0. net Profit is $400, 0 and -100. What are the expected cash payoff and expected rate of return? Calculate the variance and standard deviation of this rate of return.

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Solution Summary

Solution describes the steps to calculate expected return, variance and standard deviation of return in the given case.

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Please refer attached file for better clarity of tables and missing formulas.

Expected Payoff and Return
Probability, P Payoff, C Return, R P*C P*R
0.10 500 400.00% 50 40.00%
0.50 100 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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