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Expected Value
Source:
Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order
it here)
The probability
weighted value of a variable is the expected value of that variable.
If a firm’s decision makers think, for example, that there is a
10% probability that next year’s profits will be $100,000; a 55% probability
that they will be $200,000; and a 35% probability that they will be $300,000,
then the expected value of profits is:
E[profits]
=
0.10 x ($100,000) + 0.55 x ($200,000) + 0.35 x ($300,000)
=
$10,000 + $110,000 = $105,000
=
$225,000.
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