Question

The probability of the economy booming is 24 percent. Otherwise, the economy will be normal. Stock G is expected to return 19 percent in a boom and 12 percent in a normal of stock H?

a. 0.000193
b. 0.001387
c. 0.000219
d. 0.001402
e. 0.000168

Answer 1

The expected profit after one year for a person who invests $1,000 in stock, considering all possible outcomes with their respective probabilities, is calculated to be $150.

Step-by-step explanation:

To calculate the expected profit after one year for the person who invests $1,000 in stock, we need to consider all possible outcomes and their respective probabilities. We have three scenarios given:

• The stock could become worthless, which has a 35% probability. In this case, the loss is $1,000.
• The stock retains its value of $1,000, with a 60% probability, leading to no profit or loss.
• The stock increases in value by $10,000, with a 5% probability, resulting in a profit of $10,000.

To find the expected profit, we use the formula:

Expected Profit = Sum of (Probability of Outcome x Value of Outcome)

Inserting the given values, we get:

Expected Profit = (0.35 x -$1,000) + (0.60 x $0) + (0.05 x $10,000) = -$350 + $0 + $500

Expected Profit = $150

Therefore, the expected profit after one year is $150.