Dinapama Manufacturing and Supplies is also a manufacturer of winter coats. Because of global warming they are uncertain if they should continue with the manufacturing of their normal range of heavy winter coats or if they should switch to a lighter type of jacket. The following probabilities were given to them by researchers in weather patterns for this coming winter:
|Type of winter||Probability|
They have estimated that if it is a mild winter their expected return on their normal coats will be 5%; if it is a normal winter 20% and if it is a cold winter 35%. Their expected return, if they were to decide to manufacture the lighter type of jacket is 40% in a mild winter, 15% and in a cold winter and -5% in an extra cold winter. Required:
- Calculate the variance for the normal coats as well as the lighter jackets. (8)
- Calculate the standard deviation for normal coats and the lighter jackets. (4)
- Comment on the risk of the two options and recommend an option if the company is risk averse.
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