Answer:
The expected value of profit is 4,500$ and I would advise the investor to make the investment.
Step-by-step explanation:
Used Terminologies:
In general, the expected profit is calculated by using following equation:
E(Profit_x) = (Probability of x) * (Profit in x scenario)
E(Profit) = Total Expected Profit = Sum of expected profits from all possible outcomes
E(Profit_A) = Expected Profit against possible outcome A.
E(Profit_B) = Expected Profit against possible outcome B.
E(Profit_C) = Expected Profit against possible outcome C.
E(Profit_D) = Expected Profit against possible outcome D.
We have 4 possible outcomes with 4 different possibilities as under:
Possible Outcome 1 (A): She has 0.25 probability of 20,000$ profit
E(Profit_A) = (Probability of A) * (Profit from scenario A)
E(Profit_A) = 0.25 * (-20,000)
E(Profit_A) = -5,000$
Similarly we have from Possible Outcomes 2(B) , 3(C) & 4(D) as under respectively:
E(Profit_B) = 0.2 * (10,000)
E(Profit_B) = 2,000$
E(Profit_C) = 0.15 * 50,000
E(Profit_C) = 7,500$
E(Profit_D) = 0.4 * 0
E(Profit_D) = 0$
Therefore we have total expected profit from the investment as:
E(Profit) = E(Profit_A) + E(Profit_B) + E(Profit_C) + E(Profit_D)
E(Profit) = -5000 + 2000 + 7500 + 0
E(Profit) = 4,500$
