Business Statistics
Expected value
Would you choose a risky project with the better average payoff?
Expected value weights every possible outcome by its probability.
E[X] = Σ probability × outcome
Σ means add the probability-weighted outcomes. Treat losses as negative. 0.60 × ₹100 + 0.40 × (−₹50) = ₹40.
A 60% chance of ₹100 and a 40% chance of losing ₹50 yields an expected ₹40.
Σ means add the probability-weighted outcomes. Treat losses as negative. 0.60 × ₹100 + 0.40 × (−₹50) = ₹40.
A project has a 25% chance to gain ₹200 and a 75% chance to lose ₹40. What is its expected payoff?