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 $40 comma 000. If the economy grows at a moderate pace, the investment will result in a profit of $10 comma 000. However, if the economy goes into recession, the investment will result in a loss of $40 comma 000. You contact an economist who believes there is a 20 % probability the economy will remain strong, a 60 % probability the economy will grow at a moderate pace, and a 20 % probability the economy will slip into recession. What is the expected profit from this investment?

Question

Business

Rocco Frost

18 March, 16:50

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 $40 comma 000. If the economy grows at a moderate pace, the investment will result in a profit of $10 comma 000. However, if the economy goes into recession, the investment will result in a loss of $40 comma 000. You contact an economist who believes there is a 20 % probability the economy will remain strong, a 60 % probability the economy will grow at a moderate pace, and a 20 % probability the economy will slip into recession. What is the expected profit from this investment?

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Answers (1)

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Annabella Harvey · Answer 1

The expected profit from the investment is $6,000

Explanation:

In this question, we are asked to calculate the expected profit from the investment.

To calculate this, we approach the question mathematically. This is done by multiplying the individual events with their probabilities and adding the answers together.

= (40,000) (20%) + (10000) (60%) + (-40,000) (20%)

=8,000 + 6,000 - 8,000

= $ 6000