Question

An investor owns a bond. Suppose there is a 20% probability the investor will lose $100 on the bond and an 80% probability the investor will gain $30 on the bond. Find the expected value (expected return) of the bond. Enter the number only. Do not include the $ sign.

Answer 1

Answer: 4

======================================================

Work Shown:

A = event of losing $100

P(A) = probability event A occurs = 0.20

V(A) = net gain of event A happening = -100

B = event of gaining $30

P(B) = probability event B occurs = 0.80

V(B) = net gain of event B happening = 30

-----------------

E(X) = expected value

E(X) = P(A)*V(A) + P(B)*V(B)

E(X) = 0.20*(-100) + 0.80*(30)

E(X) = 4

The expected value is $4

This means the investor expects to get an average return of $4.