Question

A stock has a 25% probability of increasing by $10 and a 75% probability of decreasing by $5. What is the stocks expected increase or decrease?

Please help me!!

Answer 1

The stocks expected decrease is of $1.25.

Explanation:

To find the expected change, we multiply each change by it's probability.

We have that:

There is a 25% probability of increasing by $10.

There is a 75% probability of decreasing by $5(that is, 75% probability of the value being -5).

What is the stocks expected increase or decrease?

0.25*10 - 0.75*5 = -1.25

Negative, so a decrease.

The stocks expected decrease is of $1.25.