Question

n investor is considering a $10,000 investment in a start-up company. She estimates that she has probability 0.39 of a $23,000 loss, probability 0.24 of a $8700 profit, probability 0.12 of a $31,000 profit, and probability 0.25 of breaking even (a profit of $0). What is the expected value of the profit? Would you advise the investor to make the investment? Part: 0 / 20 of 2 Parts Complete

Answer 1

Answer:

The expected profit is -$13,162.

I would not recomend the investor to make this investment.

Explanation:

The expected profit can be calculated multypling the probabilities of every outcome and the profit of each outcome, and substracting the total invevstment.

The outcomes are:

1) probability 0.39 of a $23,000 loss,

2) probability 0.24 of a $8700 profit,

3) probability 0.12 of a $31,000 profit, and

4) probability 0.25 of breaking even

NOTE: It is assumed that the outcomes does not include the initial investment.

Then, the expected profit of this investment is:

$E(P)=[0.39*(-23,000)+0.24*8,700+0.12*31,000+0.25*0]-10,000\\\\E(P)=[-8,970+2,088+3,720+0]-10,000\\\\E(P)=-3,162-10,000\\\\E(P)=-13,162$