One evening, your menacing sister-in-law Yolanda confronts you on the expansive front porch of your country home. She has always been jealous of your success and is constantly questioning your understanding of risk. She asks you to pair a probability of occurrence with a particular outcome (e.g. the probability of a loss of 50,000 is 25%). The probabilities and outcomes represent the set of all possible events and their probabilities. Prob Outcomes 0.40 45000 0.60 -60000 Pair the two probabilities and outcomes that lead to the lowest risk of loss.

To determine the pair that results in the lowest risk of loss, we need to consider the probability of occurrence and the associated outcome. In this case, the probability of 0.40 (40%) paired with an outcome of $45,000 provides the lowest risk of loss. With this pairing, there is a 40% chance of a loss, but the potential loss is only $45,000.

By contrast, the other option presented in the question is a probability of 0.60 (60%) paired with an outcome of -$60,000. This pairing represents a higher risk of loss, as there is a higher probability of occurrence (60%) and a greater potential loss (-$60,000).

Choosing the pair with the lower probability and a more favorable outcome results in a reduced risk of loss. It is important to consider both the probability and potential outcomes to assess and manage risk effectively.

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