Question

An investment counselor calls with a hot stock tip. He believes that if the economy remains strong, the investment will result in a profit of $60,000. If the economy grows at a moderate pace, the investment will result in a profit of $10,000. However, if the economy goes into recession, the investment will result in a loss of $60,000. You contact an economist who believes there is a 30% probability the economy will remain strong, a 60% probability the economy will grow at a moderate pace, and a 10% probability the economy will slip into recession. What is the expected profit from this investment?

Answer 1

Answer: expected profit = 18,000 dollars

Step-by-step explanation:

expected value formulae = x * p(x)

x= data value, p(x) = probability of data value

When the economy is strong

profit to be made = 60,000 dollars

probability that economy will be strong = 30/100 = 0.3

expected value = profit * probability at which profit is made

expected value = 0.3 * 60000

expected value = 18,000 dollars

When economy grows at moderate pace

profit to be made = 10,000

probability that economy will be moderate = 60/100 = 0.6

expected value = 0.6 * 10000

expected value = 6,000 dollars

When economy is in recession

loss to be made = -60,000

probability that economy will be in recession = 10/100=0.1

expected value = 0.1 * -60000 = -6000 dollars

negative sign denotes loss.

total investment = 18,000 + 6000 - 6000

total investment = 18,000 dollars