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 $30 comma 000. If the economy grows at a moderate pace, the investment will result in a profit of $10 comma 000. However, if the economy goes into recession, the investment will result in a loss of $30 comma 000. You contact an economist who believes there is a 20% probability the economy will remain strong, a 60% probability the economy will grow at a moderate pace, and a 20% probability the economy will slip into recession. What is the expected profit from this investment?

Expected profit is the profit that an investor is expecting (anticipating) to receive from a security. It tells the investor how much of return on average will he generate from a security by taking different scenarios into account. The expected profit is calculate as:

[tex]E(R_i) = SUM (R_i * P_i)[/tex]

where

E(R) = Expected profit

R = Profit

P = Probability

i = Each respective scenario

The formula takes each profit and multiply it with the respective probability (chance), and the add up the results of all the scenarios.

⇒ Expected profit = [(30,000 * .2) + (10,000 * .6) + (-30,000 * .2)]

OR Expected profit = 6,000 + 6,000 - 6,000 = $6,000.

It means that the investor is expecting that the stock will generate a profit of $6,000 on average.

batolisis batolisis · Answer 2 · 2020-04-05T19:03:22+02:00

Answer:

expected profit = $6000

Explanation:

The expected profit is the return on investment expected by an investor on a financial investment or as with the question the return on investment on the stocks purchased by an investor

To get the expected profit ( return on investment ) from the investment considering the different probable return on investments given, we will have to take a summation of all the possible returns on investments multiplied by their probabilities

I.e Expected profit = sum ( P * r )

P = profits

r = probabilities

equation of expected profit = [ ( 30000 * 0.2) + ( 10000 *0.6 ) + ( - 30000 * 0.2) ]

= $6000 + $6000 + (-$6000)

therefore the expected profit = $6000