Question

An investment counselor calls with a hot stock tip. He believes that if the economy remain strong the investment rules will result In a profit of $30,000. If the economy grows at a moderate pace the investment will result in a profit of $10,000 however if the economy goes into recession the investment will result in a loss of $30,000. You contact and economics who believes there is a 20% probability the economy will remain strong a 70% probability the economy will grow at a moderate pace in a 10% probability the economy will slip into recession. What is the expected profit from this investment?

Answer 1

Answer: $10,000

Explanation:

Given the following :

Profit if economy remains strong = $30,000

Profit if economy grows at moderate pace = $10, 000

Loss if economy goes into recession = $30,000

Probability that economy will remain strong = 20% = 0.2

probability the economy will grow at a moderate pace = 70% = 0.7

probability the economy will slip into recession = 10% = 0.1

Expected value = sum of (x * p(x))

Here expected value equals;

Strong economy profit = $30,000 * 0.2 = $6000

Moderate economy profit = $10,000 * 0.7 = $7000

Loss on Recession = $30,000 * 0.1 = $3000

Expected profit = $(6000 + 7000 - 3000)

Expected profit = $10,000