Expected Value or Mathematical

Expectation
• Expected Value(EV) or Mathematical
Expectation(ME)
Depends on two factors: the probability that
the event will occur and the amount of money to
receive.
• Computation of EV
If P represents the probability and X represents the
amount of money,
EV = Σ Pi Xi , i = 1 to k
EV = 0, fair ; EV = +, profit ; EV = -, loss
 Problem Set
1. In a game involving a roll of single die, the
following rules have agreed upon: Mr. JB pays
P200 for each roll of the die. If a 6 comes out, he
will receive P600; if a 5 comes out he will receive
P250, and if a 4 or 2 comes out he will receive
P400. He will receive nothing for a 1 or 3. What
is his EV?
2. A manager has to decide whether to accept a
bid or not. If he accepts the bid, the company
may gain P2 million if it succeeds, or lose P1.5
million if it fails. The probability that it will
succeed is 30%. Find the EV if he accepts the
bid.
3. A man buying a raffle ticket can win a first
prize of P15,000 or a second prize of P12,000
with probabilities of .002% and .0015%,
respectively. What should be the fair price to
pay for the ticket? (The fair price is equivalent to
EV)
For the probability distribution shown below
X 8 12 16 20 24
p(X) 1/8 1/6 3/8 ¼ 1/12
Find a. E(X) = Σ X p(X) , this represents the mean
of the distribution
b. E(X –Mean)2 = Σ(X- Mean)2p(X), this
represents the variance of the distribution