An investor is considering a $25,000 investment in a start-up company. She estimates that she has probability 0.05 of a $15,000 loss, probability 0.15 of a $20,000 loss,
Probability 0.35 of a $35,000 profit, and probability 0.45 of breaking even (a profit of
$0)) What is the expected value of the profit?
A) $0
B) $16,000
C) $8500
D) $19,750

Question

Quizplus · Accepted Answer

The expected value of the profit is calculated by multiplying each outcome by its probability and then summing these products. Here, it is: (0.05 * -$15,000) + (0.15 * -$20,000) + (0.35 * $35,000) + (0.45 * $0) = -$750 - $3,000 + $12,250 + $0 = $8,500.

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