An investment pays $1,200 a quarter of the time; $1,000 half of the time; and $800 a quarter of the time. Its expected value and variance respectively are:

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Quizplus · Accepted Answer

The expected value is the average of the possible outcomes, weighted by their probabilities. In this case, the expected value is (1200 * 1/4) + (1000 * 1/2) + (800 * 1/4) = $1000. The variance is the average of the squared differences between the possible outcomes and the expected value. In this case, the variance is [(1200 - 1000)² * 1/4] + [(1000 - 1000)² * 1/2] + [(800 - 1000)² * 1/4] = $20,000.

An Investment Pays $1,200 a Quarter of the Time; $1,000