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?

Answer 1

22,250

Explanation:

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Answer 2

Expected value of the investment is $ 22,250

Explanation:

Expected value of the investment=probability of first outcome*value of first outcome+probability of second outcome*value of second outcome+probability of third outcome*value of third outcome

probability of first outcome is 25% =0.25

probability of second outcome is 25% =0.25

probability of third outcome is 50% =0.50

value of first outcome is $18,000

value of second outcome is $20,000

value of third outcome is $25,500

expected value of investment=0.25*$18,000+0.25*$20,000+0.50*$25,500

=$4500+$5000+$12750

=$22,250