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 $30,000 If the economy grows at a moderate​ pace, the investment will result in a profit of $20,000 However, if the economy goes into​ recession, the investment will result in a loss of ​$30,000 You contact an economist who believes there is a 30​%probability the economy will remain​ strong, a 60​%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?

Answer 1

Answer:

Given that:

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

The formula to compute the expected profit is shown below:

= Strong Profit * Strong Probability + Moderate profit * moderate Probability - Recession Loss *recession probability

= (30000*0.30) + (20000*0.60) - (30000 × 0.10)

= 9000+12000-3000

= 18000

The expected profit is $18000