Question

A cd has 5% chance of being a smash hit an profiting $5.2 million a 50% chance of being a modest success and profiting $0.9 million and a 45% chance of being a flop what is the expected earning value of the cd

Answer 1

710,000

Explanation:

P(S) = Probability of Smash = 0.05 (5%)

P(M) = Probability of Modest = 0.5 (50%)

P(F) = Probability of Flop = 0.45 (45%)

Use the discrete random variable model,

E(X) = (0.05 * 5.2) + (0.5 * 0.9) + (0.45 * 0)

= 0.26 + 0.45 + 0 = 710,000