Fill in the blank, giving your answer in whole dollars. According to the analyst

Question

Fill in the blank, giving your answer in whole dollars.

According to the analyst’s probability model, the expected yearly return (profit or loss) on the investment is $ ____________.

5. A friend is considering investing in a company. If he wants to invest, he must purchase $5,000 worth of shares. An analyst with no ties to the company predicts that every twelve months his investment will either earn him a profit of $1,000 with probability 0.85 or will cause him to lose $1,500 of his investment with probability 0.15. He wants you to use your probability skills to help him decide whether the investment is worthwhile.

Fill in the blank, giving your answer in whole dollars.

According to the analyst’s probability model, the expected yearly return (profit or loss) on the investment is $ ____________.

Explanation / Answer

Let X is a random variable shows the amount your frind will get after one year. Here X can take values X= 5000+1000=6000 or X = 5000-1500 = 3500. So expected amount we will get after one year is

E(X) = P(X=6000)*6000+P(X=3500)*3500 = 0.85*6000 + 0.15*3500 = 5625

So expected amunt he will get after one year is $5625 - $5000 = $625

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