What is the expected value of a stock investment of $20,000 that has a 25% chance of decreasing to a value of $18,000, a 25% chance of maintaining a value of $20,000, and a 50% chance of increasing to a value of $25,500?
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I just took the test it’s 22,250
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The expected value of the stock investment is $22,250
Explanation:
- The expected value of the investment is computing by taking into consideration the possible outcomes or results for the proposed investment.
- The expected value of the stock investment is computed as:
Expected value = 25% decrease in the value of $18,000 + 25% maintaining the value of $20,000 + 50% increase in the value of $25,500
= $18,000 × 25% + $20,000 × 25% + $25,500 × 50%
= $4,500 + $5,000 + $12,750
= $22,250
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