An investment counselor calls with a hot stock tip. He believes that if the econ

Question

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 $60,000. If the economy grows at a moderate pace, the investment will result in a profit of S20.000. However, if the economy goes into recession, the investment will result in a loss of $60,000. You contact an economist who believes there is a 20% probability the economy will remain strong, a 70% probability the economy will grow at a moderate pace, and a 10% probability the economy will slip into recession. What is the expected profit from this investment? The expected profit is $

Explanation / Answer

Solution:

economy strong 60,000 * 20%
moderate 20,000 * 60%
recession 50,000 * 10%

E(profit) = (60000)(20%) + (20000)(60%) + (-60000)(20%) = $12000

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.