176 Financial Management where: x =the expected value ‘The calculations for the standard deviation for the probabi in Table-1 are provided in Table-2 below: ty distribution given TABLE NPV Expected Deviations ‘Suare Probe: ‘Square @ calue (EV) from EV (©) Deviations bility Deviations from EV weighted @ 32-2 4-3)x03) 6) o. 3,000 4,060) 1,060 11,23,600 010 112,360 3,000 4,060, 410 168,100 020 33,620 4,000 4,060 -60 = 3,600 040 1440 4,600 4,060 +590 348,100 020 69,620 5,000 4,060 +940 = 883,600 10 88,360 3,05,400 Variance = ,2)(¥/-3) B [Eye (2,007 JER05A000 = & 552.63 Standard Deviation Interpretation of the standard deviation: The standard deviation in the normal distribution is unique in that one standard deviation to either side of the mean incorporates 68.3% of all the possible outcomes. We can infer 68.3% certainty that, if the distribution is correctly specified in the first place, the occurence will be within one standard deviation above below the mean. This is illustrated in Figure-4. x+tlo = 68.3% of all possible outcomes 420 = 95% of all possible outcomes 430 = 99.7% of all possible outcomes ‘Two standard deviations to either side of the mean implies that we can be 95% certain that one of the possible outcomes within that area will occur. We can extend this to 99.7% certainty by taking the area under three standard deviations to either side of the mean of a normal distribution. Thus, if we are looking at two normal distribution, one with an expected value of % 10,000 and a standard deviation of 7 2,500, the other with an expected value of % 25,000 and a standard deviation of @ 4,000 we can conclude that the second distribution has more dispersion, hence, more absolute risk associated with it. This does not mean that the second distribution is less desirable, just that ithas more absolute risk. While the standard deviation gives