Question

An investor has purchased stock in a firm. The investor believes that, at the end of the year, there is 0.20 probability that the stock will show a $3000 profit, a 0.10 probability that the stock will show a $6000 profit, and a 0.70 probability that the stock will show a $2000 loss. What is the expected profit in the stock?

Answer 1

Answer:

loss of $200

Explanation:

As given, there are three cases can happen:

1) 0.20 probability that the stock will show a $3000 profit

=> 0.20 probability that profit = $3,000

2) 0.10 probability that the stock will show a $6000 profit

=> 0.10 probability that profit = $6,000

3) 0.70 probability that the stock will show a $2000 loss

=> 0.70 probability that profit = - $2,000

The expected profit in the stock at the end of the year can be calculated as following:

Expected profit = Probability case 1 x Profit case 1 + Probability case 2 x Profit case 2 + Probability case 3 x Profit case 3

=0.2 x 3,000 + 0.1 x 6,000 + 0.7 x (-2,000)

=. 600 + 600 -1,400 = -200

So that, the expected profit in the stock is the loss of $200