Question

What is the expected value of an original Investment of $3,000 that has a 10% chance of ending up with a value of $2,000, an 80% chance of ending up with a value of $3,500, and a 10% chance of ending up with a value of $4,000?
A $6,000

B. $3,500

C $3,400

D. $3,250

E $3,000

Answer 1

Answer:

Option C.

Step-by-step explanation:

The original value of  Investment = $3,000

It has a 10% chance of ending up with a value of $2,000.

Chances of loss of $1000 = 0.1

It has a 80% chance of ending up with a value of $3,500.

Chances of profit of $500 = 0.8

It has a 10% chance of ending up with a value of $4,000.

Chances of profit of $1000 = 0.1

Expected change in the value of investment is

$Change=(-\ 1000)(0.1)+(\ 500)(0.8)+(\ 1000)(0.1)$

$Change=-\ 100+\ 400+\ 100$

$Change=\ 400$

The expected change in the value of the investment is $400.

The expected value of an original Investment of $3,000 is

$\ 3000+\ 400=\ 3400$

Therefore, the correct option is C.