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Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
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Probability Distribution


Probability Distribution- The weather this weekend

Outcome Probability
Sunny 80 %
Rain 10 %
Snow 9.99995 %
Volcanic Ash 0.00005 %

The total must equal 100%

Probability Distribution - In Business

Economic Outcome Probability Return on Investment
Great 20% 25%
Good 40% 15%
So-So 30% 5%
Really Bad 10% 0%
  • Economic Outcome = What might happen next year to the country's overall economy.
  • Probability = Estimate of the likelihood that the economy will be in each outcome.
  • Return on Investment = Estimate of your profit in each economic outcome.

Taking a Weighted Average - Expected Rate of Return (ERR)

What is the most likely return on your investments next year? Just multiply it out and add.

Probability Times Outcome Equals Result
20% X 25% = 5%
40% X 15% = 6%
30% X 5% = 1.5%
10% X 0% = 0%
      Total 12.5%

So after taking a weighted average the Expected Rate of Return (ERR) is 12.5%








About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".

Copyright © 1997 - 2009 by Mark McCracken , All Rights Reserved