Business High School

An investment counselor calls with a hot stock tip. He believes that if the economy remains​ strong, the investment will result in a profit of ​$40 comma 00040,000. If the economy grows at a moderate​ pace, the investment will result in a profit of ​$10 comma 00010,000. ​However, if the economy goes into​ recession, the investment will result in a loss of ​$40 comma 00040,000. You contact an economist who believes there is a 2020​% probability the economy will remain​ strong, a 7070​% probability the economy will grow at a moderate​ pace, and a 1010​% probability the economy will slip into recession. What is the expected profit from this​ investment?

Answers

Answer 1

Answer: 11,000

Explanation:

Given the following :

PROFIT on investment when economy is strong = 40,000

Profit on investment when economy is moderate = 10,000

Loss on investment if economy goes into recession = 40,000

Probability that economy remains strong = 20%

Probability that economy will grow moderately = 70%

Probablity of slipping into recession = 10%

Expected profit on investment :

(20% × 40,000) + (70% × 10,000) - (10% × 40000)

(0.2 × 40000) +(0.7 × 10,000) - (0.1 × 40000)

8000 + 7000 - 4000 = 11,000

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