An investor is considering a $25,000 investment in a start-up company. She estimates that she has probability 0.05 of a $20,000 loss, probability 0.2 of a $20,000 profit,
Probability 0.15 of a $35,000 profit, and probability 0.6 of breaking even (a profit of $0).
What is the expected value of the profit?
A) $8250
B) $23,250
C) $10,250
D) $11,667

Question

Quizplus · Accepted Answer

The expected value is the sum of the products of the possible profits and their probabilities. So, the expected value is:(0.05 * -$20,000) + (0.2 * $20,000) + (0.15 * $35,000) + (0.6 * $0) = -$1,000 + $4,000 + $5,250 + $0 = $8,250

An Investor Is Considering a $25,000 Investment in a Start-Up