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Exam 14: Risk in Project Analysis

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Question 1

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A number of elementary events is called:

A) an event set.
B) a composite event.
C) an elementary event.
D) a probable event.
E) a subjective probability event.

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Question 2

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Use the following information to answer questions 10-12 A one year project has the following possible returns in relation to the percentage growth in personal income: The management of Roller King has determined the following subjective probabilities concerning the percentage growth in personal income: -What is the variance of the inflows?

A) 21,250,00
B) 31,250,000
C) 41,250,000
D) 51,250,000
E) none of the above

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Question 3

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In probability analysis, the term "event" is used to designate an outcome.

An efficient portfolio is a project or a combination of investments that will involve the least risk for a given rate of return.

Complete the following table.

The value of an investment that is found by subtracting the expected value of the project from each possible outcome, squaring each of these values, multiplying each squared deviation by the probability of each respective outcome, and then summing the resulting products is called the:

The value of an investment that is found by taking the square root of the variance is called the:

A risk-neutral investor is indifferent between two investments with the same expected return, regardless of their risk.

In project analysis, the assumption usually made is that the decision maker is risk averse.

For a normal distribution, the amount of the distribution that lies within plus or minus one standard deviation of the mean is approximately:

Given the following data on two one period capital projects, calculate 1) the expected value of each project's cash flows and 2) the standard deviation of probable cash flows from each project. Indicate which of the two projects would be chosen by a risk-averse decision maker if their prices were the same and they had similar lives.

A composite event consists of a number of elementary events.

For a normal distribution, the amount of the distribution that lies within plus or minus two standard deviations of the mean is approximately:

A continuous probability distribution would be represented by a bar graph and would not contain information on the probability values in between those value illustrated in the graph.

A one year project has the following possible returns in relation to the percentage growth in personal income: The management of Roller King has determined the following subjective probabilities concerning the percentage growth in personal income: a. What is the expected value of the cash inflow from the project? b. Determine the variance of the inflows. c. Determine the standard deviation of the inflows

Each event in a listing of all possible outcomes of a given situation is called a composite event.

A risk-return indifference curve shows combinations of increasingly risky investments with decreasing rates of return that are equally attractive to an investor.

If we assume that the decision maker is risk-averse, then we can conclude that the economic nature of risk is that its presence will have the following effect on the desirability of a given undertaking or investment project.

An event set consists of all elementary events that satisfy a particular outcome.

Use the following information to answer questions 13 - 15 The following data is on two one period capital projects. -What is the variance of each project's cash flow?