Page 313 - SBL Integrated Workbook STUDENT 2018
P. 313
Financial decision making
Dealing with risk in decision making
6.1 Expected value
An expected value summarises all the different possible outcomes by calculating a
single weighted average. It is the long run average (mean).
p =
the probability of the
outcome occurring
future outcome
EV = ∑px
EV (Expected x =
value) the future outcome
= long run
weighted
average
6.2 Problems in using expected values
Probabilities are subjective.
Little meaning for a one-off project.
Ignores attitudes to risk.
The answer may not exist.
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