Expected value of the payoff
October 5th, 2022
Suppose you make a $2,000 investment in a risky venture. There is a 60% chance that the payoff from the investment will be $5,000, a 15% chance that you will just get your money back, and a 25% chance that you will receive nothing at all from your investment.
a. Find the expected value of the payoff from your investment of $2,000.
b. Find the expected value of the net profit from your investment of $2,000.
c. If you invest $6,000 in the risky venture instead of $2,000, and the possible payoffs triple accordingly, what will be the expected value of the net profit from the $6,000 investment?