The expected value calculator assists investors in evaluating all probable future revenues.
How to Calculate Expected Value of Investment?
Investors can calculate the return on investment with the expected values. They can forecast the average return on their investment by considering all the possibilities. This may look a little difficult but expected values can be an answer to all investments.
Expected values can be used by individuals, organizations, to draw alternatives and make critical investment decisions. The expected value calculator figures out forecasted expected values for all investment decisions. The calculatored assist investors in knowing their future investments and their possible outcomes.
Practical Example:
Let’s suppose an investor has expected portfolio investments on various market conditions. Investors draw the scales of the market condition as 2, 3, 4, and 5, and it indicates the market and react on this scale. The possible probabilities are 0.2, 0.2, 0.3, 0.3 against each condition of the market. We use the expected value formula to draw the outcomes in all the probabilities and their expected values.
Given:
The market condition scales = 2, 3, 4, 5
The probabilities are = 0.2, 0.2, 0.3, 0.3
Solution:
The expected value E(X) of all the discrete random variable X and the expected value formula is given by:
Step 1:
E(X) = μX = ∑ [ xi * P(xi) ]
Enter the values of all the discrete values of the variable X:
Step 2:
E(X) = ( 2 ) * ( 0.2 )+( 3 ) * ( 0.2 )+( 4 ) * ( 0.3 )+( 5 ) * ( 0.3 )
Step 3:
E(X) = ( 0.4 )+( 0.6 )+( 1.2 )+( 1.5 )
Step 4:
Add the values:
E(X) = 3.7
The expected outcome is
Expected values = 3.7
The expectation calculator indicates the expected value is 3.7 against all the odds or the market scenario. This means whatever you are going to invest, it is quite probable that being an investor is going to find a return of around 3.7 times the investments.
Expected Value Table |
||
x | P(x) | x * P(x) |
2 | 0.2 | 0.4 |
3 | 0.2 | 0.6 |
4 | 0.3 | 1.2 |
5 | 0.3 | 1.5 |
∑ xi = 14 | ∑ P(xi) = 1 | ∑ xi * P(xi) = 3.7 |
Expected Values in Real Life:
The expected value is used when an investor is not completely sure about the state of the market but has an idea of the return. Then in this scenario, the Expected value is the best answer to take the alternative and pursue the decision of investments. The expected value calculator can draw all the possibilities for the investors.
The expected values can be used to make the real-time decision:
- An individual can compare the best or the worst scenario and their expected values.
- You can evaluate all the probable percentages of the outcomes to make the decision.
- Expected values sum up all the possible outcomes and assist in finding all the possible outcomes.
- This is a great help to make a critical decision and to reach a final alternative.
Whatever the possible outcomes, we use the expected value to conclude the outcome and can decide what to do in uncertain conditions.
Conclusion:
The expected value is normally used when you are not sure about the possible outcome of a certain condition. For example uncertain response of a marketplace, in this condition the expected values are drawn by the expected value calculator to reach an outcome. It is better to make a decision based on some facts rather than deciding without any solid ground to secure your investments. You can use the expected values in the common life by drawing the probabilities of the various outcomes