Question

You have $100 dollars and can invest into a stock. The returns are volatile and you may get either $120 with probability of 0.4, or $90 with probability 0.6. What is the expected value of your investment?

Answer 1

Given:

(i) You have $100 dollars and can invest into a stock.

(ii) The returns are volatile and you may get either $120 with probability of 0.4, or $90 with probability 0.6

To find:

(i) The expected value of the investmen.

Solution:

For the first case, I may get $120 with probability of 0.4.

So, Expected value = $(120*0.4)

= $48

For the second case, I may get $90 with probability of 0.6.

So, Expected value = $(90*0.6)

= $54

Total expected value = $(48+54)

= $102

The expected value of my investment will be $102.