You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favourable or unfavourable and you estimate the percent returns over the next year. What is the expected value for Company 4?
A) 5.20%
B) 5.4%
C) 5.6%
D) 9.4%

Question

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favourable or unfavourable and you estimate the percent returns over the next year.  What is the expected value for Company 4?
A) 5.20% 
B) 5.4% 
C) 5.6% 
D) 9.4%

Quizplus · Accepted Answer

To calculate the expected value, we multiply each possible return by its corresponding probability and add the results.

For Company 4: 
Expected Value = (0.3 x 3.8%) + (0.7 x 7.4%) = 1.14% + 5.18% = 6.32%

Therefore, the best choice would be to invest in Company 4 with an expected return of 6.32%.

You Have a Decision to Invest $10,000 in Any of Four