Suppose that there is a 25% chance that an investment of $1,000 will rise in value to $1,400,and a 75% chance that the investment will fall in value to $900.What is the expected return on the investment?

Question

Quizplus · Accepted Answer

To calculate the expected return, we multiply the probability of each outcome by its return and sum them up. So,

Expected Return = (Probability of Increase x Return of Increase) + (Probability of Decrease x Return of Decrease)
Expected Return = (0.25 x $400) + (0.75 x (-$100))
Expected Return = $100 - $75 = $25

Therefore, the expected return on the investment is $25. Thus, the best choice is C.

Suppose That There Is a 25% Chance That an Investment