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Calculate expected value

Calculate expected value - Microsoft Excel Tutorial

From the course: Learning Excel: Data Analysis

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Calculate expected value

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- [Instructor] When you analyze business scenarios, you will often want to calculate the expected value of an overall scenario with multiple possible outcomes. As an example, you might think that there would be three scenarios and you have assigned probabilities to each of them. So the first scenario you believe is 30% likely, the second scenario is 40%, and the third 30%. Each of those scenarios will lead to a value or outcome. So in scenario 1, the value is $5,000, positive 5,000. For scenario 2, it's 10,000. And for scenario 3, you would have a loss of $10,000. You can then calculate the expected value for each of these scenarios. To do that, you multiply the probability by the value. So the expected value for scenario 1, which is 30% likely with a $5,000 value, is 30% times 5,000 equals 1500. You can use the same calculations to calculate expected value for scenario 2 of 4,000, and scenario 3 of -3,000. You then add up all the expected values to get the overall expected value for…

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