Question

A stock trader devises a trading strategy with the following characteristics: 70% of the time this strategy will result in a gain of exactly $100; otherwise it will result in a loss of $200. What is the expected profit of this strategy, per trade?

Answer 1

$10

Step-by-step explanation:

Given that,

Probability of gain = 70%

Amount of gain = $100

Probability of loss = (1 - 70%)

= 30%

Amount of loss = $200

Expected profit of this strategy, per trade:

= (Probability of gain × Amount of gain) + (Probability of loss × Amount of loss)

= (0.70 × $100) + [0.30 × (-$200)]

= $70 - $60

= $10