Risk - Return Problem

Created by Pamela Peterson Drake

Consider the two products and the probability distributions related to possible future cash flows. Which product is riskier? Why?

Product 1    
Outcome Probability Outcome value
Pessimistic 10% -$2,199
Moderate 60% $2,116
Optimistic 30% $3,501

Product 2    
Outcome Probability Outcome value
Pessimistic 20% -$500
Moderate 40% $2,000
Optimistic 40% $3,500

Solution