Expected value (EV) describes the long-term average level of a random variable based on its probability distribution. This article will discuss, "How To Find Expected Value? What Is Expected Value (EV)?" Let's get started.
What Is Expected Value (EV)?
The expected value (EV) is the average value that is predicted for a certain investment at some point in the future. Investors use expected value to gauge an investment's ability, frequently in relation to how risky the investment is. For instance, modern portfolio theory (MPT) makes an effort to determine the ideal portfolio allocation based on the anticipated values and standard deviations of investments (ie, risk).
The expected value is calculated in statistics and probability analysis by multiplying each possible outcome by the likelihood that each outcome will occur, then adding up all of those values. Investors can select the scenario that is most likely to provide the desired result by calculating ing expected values.
How To Find Expected Value?
You must multiply every possible outcome by the relevant probability in order to determine the expected value, then add the results. The expected value shows the usual outcome you can expect over the long term. Here's a step-by-step process to calculate the expected value:
1. Identify possible outcomes: Analyze a situation's or an event's possible outcomes. One and only one of these possibilities should be possible, indicating that they should all be mutually exclusive and exhaustive.
2. Assign probabilities: Assign probabilities to each possible result. The probabilities should sum up to 1, representing the possibility of each outcome occurring, and should range from 0 to 1.
3. Multiply outcomes by probabilities: Multiply each outcome by its corresponding probability. This gives you the weighted value for each outcome.
4. Sum up the results: Add up all the weighted values to calculate the expected value. This final value represents the average or expected outcome.
To illustrate the calculation, let's consider a simple example:
Suppose you have a fair six-sided die, and you want to find the expected value of rolling the die.
1. Identify the possible outcomes: The possible outcomes are the numbers 1, 2, 3, 4, 5, and 6.
2. Assign probabilities: Since the die is fair, each outcome has an equal probability of 1/6.
3. Multiply outcomes by probabilities:
- Expected value = (1/6) × 1 + (1/6) × 2 + (1/6) × 3 + (1/6) × 4 + (1/6) × 5 + (1/6) × 6
- Expected value = (1/6)(1 + 2 + 3 + 4 + 5 + 6)
4. Sum up the results:
- Expected value = (1/6)(21)
- Expected value = 3.5
Therefore, the expected value of rolling a fair six-sided die is 3.5. This means that, on average, you can expect to roll a number close to 3.5 over a large number of rolls.
How To Find Expected Value? What Is Expected Value (EV)? - Hopefully, this article can help you to get some knowledge.
