Question

The prospects for success facing your startup are risky: there is a 0.5 probability that you lose $1 million, 0.2 probability that you break even, and 0.3 probability that you make $5 million. What is the expected return from the startup?

A. Lose $1 million

B. Break even

C. Gain $1 million

D. Gain $1.5 million

Answer 1

There is a 0.5 probability that you lose $1 million, 0.2 probability that you break even, and 0.3 probability that you make $5 million.

The expected value of return=Probability of losing*return in case of loss + Probability of breakeven*return in case of breakeven + probability of profit*Return in case of profit

Thus here the expected return from the startup=0.5*(-1)+0.2*0+0.3*5= -0.5+0+1.5=$1 million

Thus the expected return from the startup is gain of $1 million.