While performing initial feasibility analysis it was assesse

While performing initial feasibility analysis, it was assessed that two designs, A and B, have normal payoff distributions with {mean, standard deviation} of {4 million, 1 million} and {5 million, 2 million} respectively. Which design should be selected using a risk-neutral valuation? Which design should be selected if the standard deviation for design B is 4 million?

Solution

design B should be selected using a risk-neutral valuation

as it has more SD than design A so risk of falling outside the interval is less

Which design should be selected if the standard deviation for design B is 4 million?

then we should select design B