Question

An investment counselor calls with a hot stock tip. He believes that if the economy remains​ strong, the investment will result in a profit of ​$60000. If the economy grows at a moderate​ pace, the investment will result in a profit of ​$10000. ​However, if the economy goes into​ recession, the investment will result in a loss of ​$60000. You contact an economist who believes there is a 30​% probability the economy will remain​ strong, a 60​% probability the economy will grow at a moderate​ pace, and a 10​% probability the economy will slip into recession. What is the expected profit from this​ investment?

Answer 1

Expected profit = $18,000

Step-by-step explanation:

The expected profit is the weighted average of all the possible profits associated with the different possible outcome weighted according to the probability

Outcome Profit Probability Prob × Profit

Strong 60,000 × 30% = 18,000

Growth 10,000 × 60% = 6,000

Recession (60,000) × 10% = (6000)

Expected profit = 18,000 + 6000 + (6000) = $18,000

Expected profit = $18,000