Question

An investor considers investing $20,000 in the stock market. He believes that the probability is 0.20 that the economy will improve, 0.46 that it will stay the same, and 0.34 that it will deteriorate. Further, if the economy improves, he expects his investment to grow to $26,000, but it can also go down to $17,000 if the economy deteriorates. If the economy stays the same, his investment will stay at $20,000. What is the expected value of his investment?

Answer 1

Answer:

$20,180

Explanation:

The expected value (EV) refers to the future value of an investment that is being anticipated.

In probability distribution, EV of an investment is calculated by adding all the multiplications of each of the possible outcomes and the probability of occurrence of each of the outcome.

Therefore, the expected value of the investment of the investor can be calculated as follows:

EV of Investment = (0.20 × $26,000) + (0.46 × $20,000) + (0.34 × $17,000)

                             = $5,200  + $9,200 + $5,780

                             = $20,180.

Therefore, the expected value of his investment $20,180.