Business, Legal & Accounting Glossary
Average value of the possible payoffs of an investment decision, taking into account the likelihood of each payoff. An investor should buy a stock when its market price is significantly lower than its expected value; the greater this difference, higher the returns. Similarly, a firm should buy back its stock when it is trading below the expected value and so transfer wealth from the short-term stockholders to the long-term stockholders. Expected value is the best prediction of a variable’s value, and is computed by multiplying each outcome by the probability of its occurrence and then averaging them. Mathematically it is described as the probability-weighted average values of all possible outcomes, and is a measure of central tendency of a random variable. also called mathematical expectation.
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This glossary post was last updated: 20th November, 2021 | 0 Views.