Expected Value of a Risky Project
Easyprobabilityexpected value
A project has a 20% chance of a $100,000 gain and an 80% chance of a $10,000 loss. What is its expected net value?
- A−$12,000
- B$0
- C$12,000
- D$20,000
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Answer: C. $12,000
Weight each signed outcome by its probability: E[V] = 0.20($100,000) + 0.80(−$10,000) = $20,000 − $8,000 = $12,000.
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