Expected Value Exercise 4
An investment opportunity has two possible outcomes,
and the value of the investment opportunity is $250. One outcome yields a $100 payoff and has a
probability of 0.25.
What is the
probability of the other outcome?
EV= $250
ReplyDeletetwo possible outcomes: 0.25 and (1-0.25)
payoffs: $x and $100
so, the probability of the other outcome is 0.75
Known :
ReplyDeleteThe Expected Value of investment is $250
One probability of 0.25 (0.25 x 100% = 25%) has outcome yields $ 100
Solutions:
So the other probability = 100 % - 25 % = 75%
So the other outcome is :
Expected Value = ( First outcome known) (Probability of first outcome known) + (Unknown outcome) (Probability of unknown outcome)
$ 250 = ( $ 100 * 0.25 ) + ( x * 0.75 )
0.75 x = $ 250 - $ 25
0.75 x = $ 225
X = $ 225 / 0.75
X = $ 300
So the other probability is 0.75 with $ 300 possible outcome
the steps is same like excercise 3 before.
ReplyDeleteE(v) = $250
one outcome = $ 100
Probability = 0,25
as has been said on the question above One outcome yields a $100 payoff "and has a probability of 0.25"
so 1-0,25 = 0,75 is the other probability.
ANSWER:
ReplyDelete1 – 0.25 = 0.75