Question

An investment has the possibility of earning $10,000, $8,000 or $2,000 depending on the state of the economy that is prosperity, modern growth, and recession respectively. The probabilities of prosperity, moderate growth, and recession are .4, .3, and .3 respectively. The expected value of the investment is:

- $10,000.
- $21,000.
- $7,000.
- $3,000.
- $8,000.

Answer 1

The expected value of the investment is $7,000, calculated by multiplying the possible earnings by their respective probabilities and summing the results. Therefore correct option is C

Step-by-step explanation:

The expected value of the investment can be calculated using the probabilities of the different outcomes. For prosperity, the probability is 0.4 and the earning is $10,000, for moderate growth, the probability is 0.3 and the earning is $8,000, and for recession, the probability is also 0.3 with the earning being $2,000.

The formula for the expected value (EV) is the sum of each value times its corresponding probability.

Calculation:

• EV = ($10,000 × 0.4) + ($8,000 × 0.3) + ($2,000 × 0.3)
• EV = $4,000 + $2,400 + $600
• EV = $7,000

Therefore, the expected value of the investment is $7,000.