Question

An investor buys a stock that will return $200 profit if it goes up today and lose $500 if it goes down. Based on the market trend, there is 70% chance that the stock will go up and 20% chance that it will go down and 10% chance it will stay the same. What is the expected amount of return

Answer 1

The expected return on the investment is $40, calculated by considering the possibility of gaining $200 with a 70% chance, losing $500 with a 20% chance, and no change with a 10% chance.

Step-by-step explanation:

To calculate the expected amount of return for the investment in the stock, we consider the different outcomes and their respective probabilities. The expected return (ER) is calculated using the formula ER = (∑(value of outcome × probability of outcome)). In this case:

• Profit of $200 with a probability of 70%: $200 × 0.7 = $140
• Loss of $500 with a probability of 20%: -$500 × 0.2 = -$100
• No change with a probability of 10%: $0 × 0.1 = $0

The expected amount of return is calculated by adding these values together: $140 - $100 + $0 = $40.

Therefore, the expected return on the investment is $40.

Answer 2

$240

Step-by-step explanation:

The expected amount of return can be estimated by adding the product of the potential outcomes and their probabilities or chances of their occurrence.

This can be calculated for this question as follows:

U = Profit when the stock goes up = $200

D = Profit when the stock goes down = $500

S = Profit when the stock stays the same = 0$

Uc = The chance or probability of the stock going up = 70%

Dc = The chance or probability of the stock going down = 20%

Sc = The chance or probability of the stock staying the same = 10%

Therefore, we have:

Expected amount of return = (U * Uc) + (D * Dc) + (S * Sc) = ($200 * 70%) + ($500 * 20%) + (0$ * 10%) = $140 + $100 + $0 = $240

Therefore, the expected amount of return is $240.