So Malik is considering investing $900 in a certain company. Financial advisors forecast that there is a 30% chance that the stock will increase in value by 150%, and a 50% chance that he will lose his initial investment. Determine if Malik should make the investment, and find the expected value of the investment.

Question

Alvin

Mathematics

1 January, 17:58

So Malik is considering investing $900 in a certain company. Financial advisors forecast that there is a 30% chance that the stock will increase in value by 150%, and a 50% chance that he will lose his initial investment. Determine if Malik should make the investment, and find the expected value of the investment.

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Miranda Cannon · Answer 1

For the answer to the question above, a 150% increase in value on $900 means there would be a gain of $1350. There's a 30% chance this will happen.

Losing the entire investment means a loss of $900. There' a 50% chance this will happen.

The expected gain/loss is ∑ P (X) * X =.3 (+1350) +.5 (-900) = + 405 - 450 = - 45. That means the expected value is $900 - 45 = $855, which means he should NOT make the investment [D]