Formula Sheet

Answer 1

Question 2

Statistical Analysis of Risk – Standard Deviation

What does standard deviation measure in risk analysis? (2)

What is the formula for standard deviation when outcomes have equal weighting? (1)

What do the symbols in the formula represent? (3)

What does the coefficient of variation show? (1)

Answer 2

Statistical Analysis of Risk – Standard Deviation

What does standard deviation measure in risk analysis?

• Quantifies the variability of potential outcomes
• Measures how dispersed a set of numbers are

What is the formula for standard deviation when outcomes have equal weighting?

• σ = √(Σ(x − μ)² / n) - given in exam

What do the symbols in the formula represent?

• x = each possible outcome
• μ = mean (expected value)
• n = number of outcomes

What does the coefficient of variation show?

• Standard deviation as a percentage of the mean

Question 3

Statistical Analysis of Risk – Standard Deviation Around Expected Value

When is the standard deviation formula modified? (1)

Why is the formula modified in this case? (1)

Answer 3

Statistical Analysis of Risk – Standard Deviation Around Expected Value

When is the standard deviation formula modified?

• When outcomes are weighted by probability, as in expected value calculations

Why is the formula modified in this case?

• To incorporate the probabilities instead of dividing by the number of outcomes

Question 4

Demand

What is price elasticity of demand (PED)? (1)

What is the formula for price elasticity of demand (PED)? (3)

What does it mean if the value of PED is less than 1? (2)

What does it mean if the value of PED is greater than 1? (2)

pg 13

Answer 4

What is price elasticity of demand (PED)?

• A measure of how much the quantity demanded of a product or service changes in response to a change in price

What is the formula for price elasticity of demand (PED)?

• PED = (%ΔQ) ÷ (%ΔP)
  
  • Δ = Change
  • Q = Quantity
  • P = Price

What does it mean if the value of PED is less than 1?

• Demand is inelastic
• An increase in price leads to increased revenues

What does it mean if the value of PED is greater than 1?

• Demand is elastic
• An increase in price leads to decreased revenues

pg 13