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 $60000. If the economy grows at a moderate pace, the investment will result in a profit of $10000. However, if the economy goes into recession, the investment will result in a loss of $60000. 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?

Expected profit = $18,000

Explanation:

The expected profit is the weighted average of all the possible profits associated with the different possible outcome weighted according to the probability

Outcome              Profit         Probability      Prob ×  Profit

Strong            60,000    ×  30%          =    18,000

Growth              10,000    ×   60%        =    6,000

Recession       (60,000)   ×   10%        =     (6000)

Expected profit = 18,000 + 6000 + (6000) = $18,000

Expected profit = $18,000

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