Expected Return

• Jun 7th 2009, 04:29 AM
AlgebraicallyChallenged
Expected Return
Dear Forum , I am having problems with the following :
After careful testing and analysis an oil company is considering drilling in two different sites. It is estimated that site A will net \$30 million if successful (probability .2) and will lose \$3 million if it is not (probability .8). Site B will net \$70 million if successful (probability .1) and lose \$4 million if not (probability .9). Which site should the company choose according to the expected return from each site?

Thanks , -AC-
• Jun 7th 2009, 04:44 AM
The Second Solution
Quote:

Originally Posted by AlgebraicallyChallenged
Dear Forum , I am having problems with the following :
After careful testing and analysis an oil company is considering drilling in two different sites. It is estimated that site A will net \$30 million if successful (probability .2) and will lose \$3 million if it is not (probability .8). Site B will net \$70 million if successful (probability .1) and lose \$4 million if not (probability .9). Which site should the company choose according to the expected return from each site?

Thanks , -AC-

A: Expected return = (30)(0.2) + (-3)(0.8) = \$3.6 million.
B: Similar calculation to above.
Now make the comparison.