Use the following two probability distributions for sales of a firm to answer the following question: Which distribution is more risky?
A)Distribution 1 has a higher variance than Distribution 2,so Distribution 1 is more risky.
B)Distribution 2 has a higher variance than Distribution 1,so Distribution 2 is more risky.
C)Distribution 2 has a larger standard deviation than Distribution 1,so Distribution 2 is more risky.
D)both b and c

Question

Use the following two probability distributions for sales of a firm to answer the following question:  Which distribution is more risky?
A)Distribution 1 has a higher variance than Distribution 2,so Distribution 1 is more risky. 
B)Distribution 2 has a higher variance than Distribution 1,so Distribution 2 is more risky. 
C)Distribution 2 has a larger standard deviation than Distribution 1,so Distribution 2 is more risky. 
D)both b and c

Quizplus · Accepted Answer

Risk is measured by the variability or volatility of the probability distribution. In this case, we can look at the variance and standard deviation of the two probability distributions. If Distribution 2 has a higher variance than Distribution 1, it means that the sales of the firm are more widely distributed around the mean or expected value, and therefore more risky. Similarly, if Distribution 2 has a larger standard deviation than Distribution 1, it means that the sales are more spread out, and therefore more risky. As both conditions are satisfied by Distribution 2 in comparison to Distribution 1, we can choose option D as the correct answer.

Use the Following Two Probability Distributions for Sales of a Firm