Suppose that there is a 50% chance that an investment of $1,000 rises in value to $1,200,and a 50% chance that the investment falls in value to $900.What is the expected return on the investment?

Question

Quizplus · Accepted Answer

To find the expected return on the investment, we need to calculate the weighted average of the possible returns, using the probabilities as weights.

Expected return = (probability of $1,200 return x $1,200) + (probability of $900 return x $900)
Expected return = (0.5 x $1,200) + (0.5 x $900) = $1,050

Therefore, the expected return on the investment is $1,050. However, since the initial investment was $1,000, the net return is $1,050 - $1,000 = $50. Therefore, the best choice is B.

Suppose That There Is a 50% Chance That an Investment