M6 Postassessment & NCFE question review: M6 Postassessment & NCFE question review By M Willatt
The question below is from a released version of the NC Final Exam for AFM. You may also see a question like this on the M6Post.: The question below is from a released version of the NC Final Exam for AFM. You may also see a question like this on the M6Post. An investor bought 1,500 shares of a stock for $6 a share. He estimates the probability that the stock will rise to a value of $25 a share is 24%, and the probability it will fall to $2 a share is 76%. What is the expected value of the investor’s profit from buying the stock?
Slide3: To start off, let’s find the expected value E(X) per share based on his projections: Remember E(X) = x*P(x) + x*P(x) E(X) = 25*0.24 + 2*0.76 = 7.52 x outcome) P(x) (probability) 25 0.24 2 0.76 STEP 1
Therefore, he expects each share to be worth $7.52 over time.: Therefore, he expects each share to be worth $7.52 over time. Since the investor paid $6 each, that would be a net profit of $1.52 per share. E(X) – cost = 7.52 – 6.00 = 1.52 STEP 2
Slide5: STEP 3 If the net value is $1.52 per share and he bought 1,500 of them, we need to multiply to find the expected value of his overall profit. $1.52 * 1500 = $2,280 Therefore, if his projections are correct, he should make $2280 off of his investment.
ATTRIBUTIONS: ATTRIBUTIONS Released NCFE question 18 from: www.ncpublicschools.org/docs/accountability/testing/releasedforms/afmreleased15.pdf Stock image by geralt on pixabay.com via CC0