Question

An investment counselor calls with a hot stock tip. He believes that if the economy remains strong, the investment will result in aprofit of $50,000. If the economy grows at a moderate pace, the investment will result in a profit of $10,000. However, if theeconomy goes into recession, the investment will result in a loss of $50,000. You contact an economist who believes there is a 20%probability the economy will remain strong, a 60% probability the economy will grow at a moderate pace, and a 20% probability theeconomy will slip into recession. What is the expected profit from this investment?The expected profit is $(Type an integer or a decimal.)

Answer 1

6000

Step-by-step explanation:

The expected profit from the investment can be calculated as the multiplication of each possible profit or loss by their respective probability.

Therefore, the expected profit is equal to:

E = 50,000(0.2) + 10,000(0.6) + (-50,000)(0.2)

E = 10,000 + 6,000 - 10,000

E = 6,000

Because there is a 20% of probability to win $50,000 (economy remain strong), there is a 60% of probability to win $10,000 (economy grows at a moderate pace), and there is a 20% of probability a loss of $50,000 (the economy goes into recession).

Therefore, the expected profit from this investment is:

6000