SOLUTION: 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 examp

Question 1152971: 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 0.6, the investment will return 50 cents for every dollar you invest, and with a probability of 0.4, the investment will lose 30 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.
Answer by ikleyn(52847) (Show Source): You can put this solution on YOUR website!
.


Let x be the amount invested.


Then the expected positive return is 0.6*0.5x.

     The expected lose is            0.4*0.3x.


The net expected return is           0.6*0.5x - 0.4*0.3x = (0.6*0.5-0.4*0.3)x = 0.18x.


The expected net return rate is   = 0.18.      ANSWER

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