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Unformatted text preview: In order for Jevan to be able to calculate this expected value, he needs to account for all possible outcomes, so that the total probability will be equal to 1: let's assume that huge success, moderate success, and failure are the only possible outcomes, so the probability of at least one of them occurring is equal to 1. If Jevan thinks that there is a 1 in 8 chance that the startup will be a wild success, a 1 in 2 chance that it will be a moderate success, and a 3 in 8 chance that it will fail, then he has accounted for all possible outcomes, since the combined probabilities are equal to 1: (0.125 + 0.5 + 0.375) = 1 Next Jevan has to assign values to each outcome. In the event of huge success, Jevan thinks that each share of stock will be worth $20. In the event of moderate success, each share will be worth $5. In the event of failure, each share is worth $0. Combining each share will be worth $5....
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This note was uploaded on 12/13/2011 for the course ECO 1320 taught by Professor Staff during the Fall '11 term at Texas State.
- Fall '11