In finance the notion of expected value is used to analyze investments for which the investor has an estimate of the chances associated with various returns (and losses). For example, suppose you have the following information about one of your investments: With a probability of 0.7, the investment will return 60 cents for every dollar you invest, and with a probability of 0.3, the investment will lose 20 cents for every dollar you invest. The expected rate of return for this investment is calculated the way we calculate the expected value of a game: Multiply the probability of each outcome by the amount you earn (or by minus the amount if you lose) and add up these numbers.

Question

Mathematics

River Cruz

16 February, 07:30

In finance the notion of expected value is used to analyze investments for which the investor has an estimate of the chances associated with various returns (and losses). For example, suppose you have the following information about one of your investments: With a probability of 0.7, the investment will return 60 cents for every dollar you invest, and with a probability of 0.3, the investment will lose 20 cents for every dollar you invest. The expected rate of return for this investment is calculated the way we calculate the expected value of a game: Multiply the probability of each outcome by the amount you earn (or by minus the amount if you lose) and add up these numbers.

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Simeon Cummings · Answer 1

Step-by-step explanation:

The expected return is given as

Expected Return = SUM (Return i x Probability i). i=1,2,3 ...

First investment

Probability of 0.7, it returns 60cents per dollars

Second investment

Probably of 0.3, it loses 20cents per dollar.

Expected return = (0.7*60) - (0.3*20)

Excepted return = 42-6

Excepted return=36cents

To dollars, 1cents is 0.01dollars

Then, 36cents = 0.36dollars

Expected return=$0.36