Question

You have inherited a lottery ticket that may be a $5,000 winner. You have a 35% chance of winning the $5,000 and a 65% chance of winning $0. You have an opportunity to sell the lottery ticket for $1,500.  

1. What is your expected return?

Answer 1

I have a lottery ticket, that may be a $5000 winner.

The chance of winning $5000, is 35%; and the chance of winning $0, is 65%.

Now, I have an opportunity to sell it for $1500.

Now, I have to find the expected return if I sell the ticket.

If the lottery ticket is the winning ticket, I win $1500, but lose $5000, so actually gain $ (1500-5000), ie. $-3500.

If the lottery ticket is not the winning one, then I simply gain $1500.

The first option happens with chance 0.35, and the second one happens with chance 0.65.

So, my expected return is

So, if I sell the ticket, my expected loss would be $250.