A stock has a 25 probability of increasing by 10 and a 75 pr

A stock has a 25% probability of increasing by $10 and a 75% probability of decreasing by $5. What is the stock\'s expected increase or decrease?

Solution

We will use the conditional probability to solve the problem

Expected increase/dec is given by :

E(X) = p*a+(1-p)*b

= $0.25*10 + $0.75*5

= $6.25

Since this is a +ive figure, we can say that the expected increase is $6.25