Question

A bank money manager estimates that the bank will experience a liquidity deficit of $400 million with a probability of 10 percent, a liquidity deficit of $900 million with a probability of 20 percent, a liquidity surplus of $600 million with a probability of 30 percent, and a liquidity surplus of $1,200 with a probability of 40 percent over the next month. What is this bank's expected liquidity deficit or surplus next month? A. $880 million liquidity surplus B. $440 million liquidity deficit C. $440 million liquidity surplus D. $880 million liquidity deficit E. None of the options is correct

how is the answer C how do we solve it?

Answer 1

C. $440 million liquidity surplus

Step-by-step explanation:

The computation of the expected liquidity deficit or surplus is shown below:

= Liquidity deficit × probability + liquidity deficit × probability + liquidity surplus × probability + liquidity surplus × probability

= -$400 million × 10% + -$900 million × 20% + $600 million × 30% + $1,200 million × 40%

= -$40 million - $180 million + $180 million + $480 million

= $440 million liquidity surplus

The surplus amount displayed in positive amount whereas deficit amount displayed in negative amount