Expected Returns: You have chosen biology as your college major because you woul

Question

Expected Returns: You have chosen biology as your college major because you would like to be a medical doctor. However you find that the probability of being accepted to medical school is about 10 percent. If you are accepted to medical school, then your starting salary when you graduate will be $300,000 per year. However, if you are not acepted, then you woudl choose to work in a zoo, where you will earn $40,000 per year. Without considering the additional educational years or the time value of money, what is your expected starting salary as well as the standard deviation of that starting salary?

Explanation / Answer

This is essentially a lottery: L(.1, .9; $300,000, $40,000) Expected return: (.1 x $300,000) + (.9 x $40,000)
=$30,000 + $36,000
=$66,000

Variance: .1(300,000-30,000)2 + .9(40,000-360,000)2 =7,290,000,000 + 14,400,000 =7,304,400,000 Standard deviation =Var 7,304,400,000 = $85,465.78 =7,290,000,000 + 14,400,000 =7,304,400,000 Standard deviation =Var 7,304,400,000 = $85,465.78

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