Question

A CD has a 5% chance of being a smash hit and profiting $5.2 million, a 50% chance of being a modest success and profiting $0.9 million, and a 45% chance of being a flop and breaking even. What is the expected earnings value of the CD?

Answer 1

The probability of profiting $5.2 million is 5% = 0.05

The probability of profiting $0.9 million is 50% = 0.5

The probability of breaking even, meaning no profit gain, is 45% = 0.45

Expected profit values of the CD is given by
(0.05×5.2) + (0.5×0.9) + (0.45×0) = 0.26+0.45+0 = 0.71 million