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08072007  #1 
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Risk and probability?
Blue Book Publishing is considering the purchase of one of two microfilm cameras R and S.Both should provide benefit over a 10year period,and each requires an initial investment on $4,000.Management has constructed the following table of estimates of rates of return and probabilities for pessimistic,most likely and optimistic results:initial investment Camera R Camera S Amount probability Amount probability $4000 1.0 $4000 1.0annual rate of returnpessimistics 20% .25 15% .20most likely 25% .50 25% .55optimistics 30% .25 35% .25a. determine the range for the rate of return for each of the two camerasb.determine the expected value of return for each camerac.which camera is riskier?

08072007  #2 
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Annual rate of return (ARR)PARR Probability of ARR for each estimatea) (lowest to highest values of ARR)S: 2030% R:15%35% b) for each camera sum(ARR*PAARS)R 5%+12.5%+7.5%= 25%S: (15*0.2)+(25*0.55)+(35*0.25)= 25.5% annualc) depends on how you measure risk and there are several ways to do this, but If you look at what you might expect in the worst 25% of the cases R returns are much better than S.Another way of looking at it is 75% of time you would expect R to outperform S.

08072007  #3 
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And profit gets the grade, as he did the homework.

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