ECONOMICS

Detailed explanation-1: -An investment project whose expected returns have a standard deviation of zero would be considered very risky. 2. There is approximately a 95% probability that the actual value (outcome) will be within two standard deviation of the expected value of a normal distribution.

Detailed explanation-2: -Standard Deviation is a degree of variation of individual items of a set of data from its average. The square root of variance is called Standard Deviation. For Capital Budgeting decisions, Standard Deviation is used to calculate the risk associated with the estimated cash flows from the project.

Detailed explanation-3: -If the risk of an investment project is different than the firm’s risk then: you must adjust the discount rate for the project based on the firm’s risk.

Detailed explanation-4: -b. False. Risk refers to a situation in which the probability of each possible outcome to a decision is unknown or meaningless.

Detailed explanation-5: -The standard deviation of cash flows is an appropriate measure of a project’s risk when the project is considered in isolation, that is, when there is no alternative project. In this case, the standard deviation provides a reasonable estimate of the total risk of the project’s cash flows.