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.

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

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When the expected value of an investment is positive, the Kelly criterion can be used to determine the optimal amount to invest based on the investor's available capital.

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