An investment counselor calls with a hot stock tip. He believes that if the economy remains strong, the investment will result in a profit of $60000. If the economy grows at a moderate pace, the investment will result in a profit of $10000. However, if the economy goes into recession, the investment will result in a loss of $60000. You contact an economist who believes there is a 30% probability the economy will remain strong, a 60% probability the economy will grow at a moderate pace, and a 10% probability the economy will slip into recession. What is the expected profit from this investment?

The expected profit is the weighted average of all the possible profits associated with the different possible outcome weighted according to the probability

Outcome Profit Probability Prob × Profit

Strong 60,000 × 30% = 18,000

Growth 10,000 × 60% = 6,000

Recession (60,000) × 10% = (6000)

Expected profit = 18,000 + 6000 + (6000) = $18,000

Expected profit = $18,000