Question

The prospects for success facing your startup are risky: there is a 0.5 probability that you lose $1 million, 0.2 probability that you break even, and 0.3 probability that you make $5 million. What is the expected return from the startup? A. Lose $1 million B. Break even C. Gain $1 million D. Gain $1.5 million

Answer 1

Expected return 1,000,000

Step-by-step explanation:

We will weight each result by their probability

Probability A 0.5 x 1,000,000 = -500,000

Probability B 0.2 x 0 = 0

Probability C 0.3 x 5,000,000 = 1,500,000

The we add them:

-500,000 + 0 + 1,500,000

Expected return 1,000,000

Remember

All the probabilities should add 1

0.50 + 0.2 + 0.3 = 1