In finance the notion of expected value is used to analyze investments for which the investor has
Question:
In finance the notion of expected value is used to analyze investments for which the investor has an estimate of the chances associated with various returns (and losses). For example, suppose you have the following information about one of your investments: With a probability of 0.9, the investment will return 40 cents for every dollar you invest, and with a probability of 0.1, the investment will lose 10 cents for every dollar you invest. The expected rate of return for this investment is calculated the way we calculate the expected value of a game: Multiply the probability of each outcome by the amount you earn (or by minus the amount if you lose) and add up these numbers.
Calculate the expected rate of return for the investment described above.
Financial Accounting
ISBN: 978-0078025549
3rd edition
Authors: J. David Spiceland, Wayne Thomas, Don Herrmann