Question

The Triple L investment club is considering purchasing a certain stock. After considerable research, the club members determine that there is a 50% chance of making $12,000, a 20% chance of breaking even, and a 30% chance of losing$6,600. Find the expectation of this purchase.

Answer 1

We would apply the formula for calculating the expectation of the mean or expected value which is expressed as

Ex = ΣxP(x)

In this scenario, from the information given,

12000 is profit at 50%

Breakeven mean = 0 because there is no profit or loss' at 20%

loss = - 6600 at 30 %

Thus,

Expectation = 50/100 * 12000 + 20/100 * 0 + 30/100 * 6600

Expectation = 6000 + 0 + 1980

Expectation = 7980

the expectation of this purchase is $7980