The expected value of an investment:
A) is what the owner will receive when the investment is sold.
B) is the sum of the payoffs.
C) is the probability-weighted sum of the possible outcomes.
D) cannot be determined in advance.

Question

Quizplus · Accepted Answer

The expected value of an investment is the probability-weighted sum of the possible outcomes, meaning that it takes into account the likelihood of each possible outcome and calculates the average return. This allows investors to make more informed decisions based on the expected return of their investment. Option A is incorrect because the expected value does not necessarily represent the price at which the investment will be sold. Option B is also incorrect because the expected value is not simply the sum of the payoffs, but rather a weighted average of all possible outcomes. Option D is incorrect because although the expected value may not guarantee a certain outcome, it can be estimated based on probability calculations.

The Expected Value of an Investment