An expected value summarises all the different possible outcomes by calculating a single weighted average. It is the long run average (mean).
The expected value is not the most likely result. It may not even be a possible result, but instead it finds the average outcome if the same event was to take place thousands of times.
The following illustrates how calculations may be performed when using expected values:
Expected value formula:
EV = Σpx
where x represents the future outcome
and p represents the probability of the outcome occurring
Example:
A company expects the following monthly profits:
Monthly profit Probability
£10,000 0.70
£20,000 0.30
Calculate the expected value of monthly profit.
Solution:
Monthly profit | Probability | px |
£10,000 | 0.70 | 7,000 |
£20,000 | 0.30 | 6,000 |
|
| 13,000 |
Expected profit is £13,000 per month.
