QTB – MAY 2016 – L1 – SA – Q13 – Statistics

Identify which statement about expected values is not true

Question

Which of the following is NOT true about expected values?

A. The worth of a decision can be evaluated as the expected value of outcomes where probabilities are assigned to different outcomes

B. Expected value is evaluated as the weighted-variance of possible outcomes

C. Use of expected values is a technique for comparing risk and return of different decisions of options

D. The expected average value is calculated by multiplying the probability of each possible outcome by the value of the outcome

E. Information can be analyzed where risk can be assessed in terms of probabilities of different outcomes

Answer

Answer:

B. Expected value is evaluated as the weighted-variance of possible outcomes

Explanation:

This statement is incorrect because:

Expected value is not calculated using variance. It is calculated as a weighted average.
The correct definition of expected value is the sum of each possible outcome multiplied by its probability.

All other statements are correct:

A. This is true. Expected value is used to evaluate decisions by considering probabilities of different outcomes.

C. This is correct. Expected value is indeed used to compare risk and return of different options.

D. This is the correct definition of expected value.

E. This is true. Expected value analysis is used when risks can be quantified in terms of probabilities.

The key misconception in option B is confusing expected value with variance. While variance is a measure of spread that uses squared deviations from the mean, expected value is a weighted average of possible outcomes.

Tags: Decision Making, Expected Values, Risk Assessment
Level: Level 1

Topic: Statistics
Series: MAY 2016

Uploader: Kwame Aikins