Final answer:
The problem involves calculating the expected profit of stock which incorporates various outcomes and their respective probabilities. It is a mathematical exercise relevant to high school students studying topics related to finance and probability. By multiplying each outcome's value by its probability and summing them up, students learn how to predict financial expectations.
Step-by-step explanation:
The question suggests a scenario involving the buying and selling of stock and assumes various outcomes based on the probability of different events occurring. The expected profit calculation is a mathematical concept that takes into account the probability of each outcome and the respective value associated with each outcome to determine what can be expected on average over time. To find the expected profit, you multiply the value of each outcome by its respective probability and then sum these products.
In this specific scenario, the student is faced with three possible outcomes:
- A 35 percent probability that the stock will be worthless.
- A 60 percent probability that the stock will retain its original value of $1,000.
- A 5 percent probability that the stock will increase in value by $10,000.
To calculate the expected profit:
- Multiply the 35 percent probability of the stock being worthless by $0 (since there is no value if it's worthless).
- Multiply the 60 percent probability by the original value of the stock, $1,000.
- Multiply the 5 percent probability by the increased value of the stock, $11,000.
Add these figures together to determine the expected profit (or loss).
Understanding these concepts is important as it can influence decisions on whether to invest in certain stocks or financial portfolios based on the probabilities and potential outcomes.