ITPEC FE Morning April 2022 Question 77
ITPEC FE Morning April 2022 — Question 77 of 80
Calculate expected profit for each product: multiply each scenario's profit by its probability (as a decimal) and sum the results.
- •A: 100,000×0.75 + 20,000×0.20 + (−40,000)×0.05 = 75,000 + 4,000 − 2,000 = 77,000
- •B: 130,000×0.60 + 30,000×0.30 + (−20,000)×0.10 = 78,000 + 9,000 − 2,000 = 85,000 ✓
- •C: 150,000×0.50 + 40,000×0.30 + (−20,000)×0.20 = 75,000 + 12,000 − 4,000 = 83,000
- •D: 100,000×0.70 + 10,000×0.20 + (−50,000)×0.10 = 70,000 + 2,000 − 5,000 = 67,000
Why not others:
- (a) A — EV = 77,000, lower than B
- (c) C — EV = 83,000, close but still less than B; high upside is offset by 20% loss probability
- (d) D — EV = 67,000, lowest of all four despite a decent High scenario
Key rule: Expected Value = Σ(profit × probability); convert % to decimals and don't forget negative profits reduce the total.
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