Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
CAPM
Security Market Line
Bond Valuation
Stock Valuation
Cost of Capital
The Balance Sheet
Capital Budgeting
Financial Terms
Financial Charts
Fuel Mileage
Energy Efficiency
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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%