If a stock analyst believes there is a 25% probability that the stock price of Dymonatis will equal $30 at the end of the year, a 50% probability that it will equal $40, and a 25% probability that it will equal $50, then the expected value of the stock at the end of the year is:
A)$30.
B)$35.
C)$40.
D)$50.

Question

Quizplus · Accepted Answer

The expected value is calculated as the sum of each outcome multiplied by its probability. Therefore, the expected value of the stock price is:

(0.25 x 30) + (0.50 x 40) + (0.25 x 50) = $7.50 + $20 + $12.50 = $40

Therefore, the best choice is C) $40 as it represents the expected value of the stock price at the end of the year.

If a Stock Analyst Believes There Is a 25% Probability