# M6Post NCFE similar question

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M6Post & NCFE question review

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### 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.