Question

The Scenario: There are two houses with almost identical characteristics available for investment in two different neighborhoods with drastically different demographic composition. Both houses cost the same amount but earn different returns. The anticipated gain in value when the houses are sold in 10 years has the following probability distribution:

Returns: Returns:
Probability Neighborhood A Neighborhood B
0.25 -$12,500 $30,500
0.40 $10,000 $24,000
0.35 $30,500 $10,500

Referring to The Scenario, what is the expected value gain for the house in neighborhood A?

Answer 1

The expected value gain for the house in neighborhood A is $7,550, calculated by summing the products of each potential gain and its corresponding probability.

Step-by-step explanation:

The expected value gain for the house in neighborhood A is calculated by multiplying each potential gain by its probability and summing these products. To do this, follow these steps:

1. Multiply each potential gain by its corresponding probability.
2. Add up all the products to get the total expected value.

Performing the calculation:

• (-12500 × 0.25) + (10000 × 0.40) + (30500 × 0.35)
• (-3125) + (4000) + (10675)
• Expected value gain = 7550

Thus, the expected value gain for the house in neighborhood A is $7,550.