Find the probability distribution of each random variable V, W, X, and Y. Determine the expected value of each random variable.

Annette Arroyo

Annette Arroyo

Answered question

2021-08-09

An investor plans to put $50,000 in one of four investments. The return on each investment depends on whether next year’s economy is strong or weak. The following table summarizes the possible payoffs, in dollars, for the four investments.
StrongWeakCertificate of deposit6,0006,000Office complex15,0005,000Land speculation33,00017,000Technical school5,50010,000
Let V, W, X, and Y denote the payoffs for the certificate of deposit, office complex, land speculation, and technical school, respectively. Then V, W, X, and Y are random variables. Assume that next year’s economy has a 40% chance of being strong and a 60% chance of being weak. a. Find the probability distribution of each random variable V, W, X, and Y. b. Determine the expected value of each random variable. c. Which investment has the best expected payoff? the worst? d. Which investment would you select? Explain.

Answer & Explanation

firmablogF

firmablogF

Skilled2021-08-10Added 92 answers

a) v | 600 
P(V=v) | 1 
w | 15000 5000 
P(W=w) | 0.40 0.60 
x | 33000 -17000 
P(X=x) | 0.40 0.60 
y | 5500 10000 
P(Y=y) | 0.40 0.60 
 

b) The expected value of each random variable: 6000, 9000, 3000, 8200 
 

c) The best is office complex W, Land speculation X 
 

d) We select investment of office complex W

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