Question

there is a 40% chance that you will lose $25,000 if you invest in a company, but there is a 25% chance that you will break even and a 35% chance that you make $40,000. what is the excepted value of the investment?

Answer 1

4000

Explanation:

Remark

The expected value is found by multiplying the value by it's probability. For the first one 40% * (- 25000) = - 10000

Breaking even means that you neither add nor subtract a given amount

25% * 0 = 0

35% * 40000 = 14000

So the expected value = - 10000 + 14000 = 4000

Summary

• Loss: - 10000
• Break Even: 0
• Win: 14000
• Expected value 4000