Question

An investor is considering a $20,000 investment in a start-up company. She estimates that she has probability 0.1 of a $15,000 loss, probability 0.05 of a $20,000 profit, probability 0.25 of a $35,000 profit, and probability 0.6 of breaking even (a profit of $0). What is the expected value of the profit

Answer 1

Expected profit = $8,250

Step-by-step explanation:

The expected rate of profit is the weighted average of all the possible profits associated with an investment decision. The profits are weighted using the probability associated with their outcome value.

Expected profit = WaRa + Wb+Rb + Wn+Rn

W- Probability of the expected profit,

R- expected profit under a circumstance

Expected profit = (0.1× -15,000) + (0.05× 20,000) + (0.25 × 35,000) +(0.6 × 0) =8,250

Expected profit = $8,250