Question

What is the expected value of a stock investment of $20,000 that has a 25% chance of decreasing to a value of $18,000, a 25% chance of maintaining a value of $20,000, and a 50% chance of increasing to a value of $25,500?

The expected value of this stock investment is $


.

Answer 1

I just took the test the answer is 22,250

Answer 2

$22500

Explanation:

initial investment = $20000 ( 25 % ) maintenance

decreasing investment = $18000 ( 25 % )

increased investment value = $25500 ( 50% )

Adding up all the available percentages it will be 100%

at 25 % there is a possibility of an increase by $2000

at 50 % there is a possibility of an increase by $5,500

at 25% there is also a possibility of no increase as well = $0

to balance up with the percentages you will need to take average of the various increases since the percentages are equal to 100 %

= (2000 + 5500 + 0) / 3 = $7500 / 3 = $2500

hence the expected value would be = $20000 + $2500 = $22500

considering the average value of the increase and decrease.