Question

An investor is considering a $25,000 investment in a start-up company. She estimates that she has probability 0.2 of a $15,000 loss, probability 0.15 of a $20,000 loss, probability 0.05 of a $40,000 profit, and probability 0.6 of breaking even (a profit of $0). What is the expected value of the profit? Group of answer choices

Answer 1

Answer:

$21,000

Explanation:

initial investment $25,000

we need to determine the expected value of every possibility:

• $15,000 loss ⇒ 20% x $10,000 = $2,000
• $29,000 loss ⇒ 15% x $5,000 = $750
• $40,000 gain ⇒ 5% x $65,000 = $3,250
• break even ⇒ 60% x $25,000 = $15,000

total expected value = $21,000