# expected value

## Definition

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.

## Use expected value in a sentence

You need to come up with an expected value on any investment to see if it will be worth taking on.

The expected value calculation clearly showed which decision provided the largest amount of profit so we continued that process for each security.