You have invested in a project that has the following payoff schedule: Probability of Payoff Occurrence $40 .15 $50 .20 $
2 answers:
Answer:
$59.
Explanation:
The expected value of investment's payoff is the amount of profit or loss that an investor is anticipating to receive. It is the investor's expectation regarding the returns of the security that he is going to invest in. The expected value of payoff is calculated by multiplying the profit/loss under each scenario with its respective probability (chances), and then adding all the results. This tool is based on the assumption that "history tends to repeat itself" because it used historical data to calculate these payoffs and theirs probabilities. The formula to calculate the expected value is given below:
where
i = Each know payoff and its respective probability under each scenario
⇒ Expected value of Payoff = [(40 * .15) + (50 * .20) + (60 * .30) + (70 * .30) + (80 * .05)]
= 6 + 10 + 18 + 21 + 4 = $59.
The means that the investor is expecting that <em>on average</em> the overall payoff of this project will be $59.
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Answer:
1/N
Explanation:
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A major advantage of this index is that it is easy to calculate while using small amount of data required for calculation.
It been used by government agencies such as the U.S. Department of Justice for cases involving mergers and acquisition.
Since we are concerned with the minimum possible value we divide .