Uncertainty In Future Events

Transcript Area

In this Excel tutorial, I'm going to be talking to you about risk. Now one common measure of risk is the probability of loss. Another common measure is to calculate the standard deviation, which measures the dispersion of outcomes about the expected value. Now in order to calculate this i'm contuning..contuning..continuing some previous examples. So this is the third tutorial in a series of three you need to watch the excep..expected value tutorial and the joint probability tutorial before getting to this one. If you finish those tutorials, what you will notice is the setup that I have here is the exact information that were..was calculated at the end of the Joint probability tutorial.

Now in order to calculate standard deviation, the standard deviation is the earned value of your variable squared minus the earned value..ba..variable squared. I know that doesn't make a lot of sense at the moment, but it will when we start doing the formulas. So notice I have copied the exact information from our joint probability Final End calculation example. We have our initial cost, our interest and we have our prop..present worth times joint probability. Now to calculate standard deviation we need to do present worth squared times joint probability. So that would equal our present worth, to square it we use the caret 2 times our joint probability. And you can see we get a huge answer of over 35 million dollars.

Now I did not lock any of the cells for this because I want to grab the corner and have everything increment. Notice that it incremented as it went down. Then what we need to do here is simply sum these. So we can equal sum and I can just grab these and close. Now, remember when you're calculating the present work times joint probability you can actually do a sum product here as shown in a previous tutorial. I think tutorial on the earned value I showed you how to do that. So remember that's always an option. Now we have our two pieces of information that we need in order to calculate the standard deviation. The formula here would be equals standard deviation is S..I'm sorry, we're going to we need to calculate the standard deviation we have to do a square root.

So it is the square root, which is S..Q..R..T and our formula that we're taking the square root of is I19, which represents our earned value of x squared. Remember our present worth is the thing that we squared, minus our present worth times joint probability squared. And you can see that our standard deviation of our expected value present worth is about $4,000. So what this is going to give you is that you now start to understand the variability of a plus or minus around that $19,716 to get you a better idea or..or more comfortable that it could be somewhere in this zone. So in this Excel tutorial, I've shown you how to handle risk in terms of using the measure of standard deviation.