M6 Postassessment & NCFE question reviewBy 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.

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?

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.

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

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

• Released NCFE question 18 from: www.ncpublicschools.org/docs/accountability/testing/releasedforms/afmreleased15.pdf

• Stock image by geralt on pixabay.com via CC0