What is the 'Expected Value'
The expected value (EV) is an anticipated value for a given investment at some point in the future. In statistics and probability analysis, the expected value is calculated by multiplying each of the possible outcomes by the likelihood each outcome will occur, and summing all of those values. By calculating expected values, investors can choose the scenario most likely to give them their desired outcome.
BREAKING DOWN 'Expected Value'
Scenario analysis is one technique for calculating the expected value (EV) of an investment opportunity. It uses estimated probabilities with multivariate models, to examine possible outcomes for a proposed investment. Scenario analysis also helps investors determine whether they are taking on an appropriate level of risk, given the likely outcome of the investment.
The EV of a random variable gives a measure of the center of the distribution of the variable. Essentially, the EV is the longterm average value of the variable. Because of the law of large numbers, the average value of the variable converges to the EV as the number of repetitions approaches infinity. The EV is also known as expectation, the mean or the first moment. EV can be calculated for single discrete variables, single continuous variables, multiple discrete variables and multiple continuous variables. For continuous variable situations, integrals must be used.
Basic Expected Value Example
To calculate the EV for a single discrete random variable, you must multiply the value of the variable by the probability of that value occurring. Take, for example, a normal sixsided die. Once you roll the die, it has an equal onesixth chance of landing on one, two, three, four, five or six. Given this information, the calculation is straightforward:
(1/6 * 1) + (1/6 * 2) + (1/6 * 3) + (1/6 * 4) + (1/6 * 5) + (1/6 * 6) = 3.5
If you were to roll a sixsided die an infinite amount of times, you see the average value equals 3.5.

Random Variable
A random variable is a variable whose value is unknown or a function ... 
Sensitivity Analysis
Sensitivity analysis is a technique used to determine how different ... 
Variable Cost Ratio
The variable cost ratio compares costs, which fluctuate depending ... 
Variability
Variability is the extent to which data points in a statistical ... 
Variable Interest Rate
A variable interest rate is a rate on a loan or security that ... 
Uniform Distribution
In statistics, a type of probability distribution in which all ...

Investing
What's a Sensitivity Analysis?
Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable). 
Investing
Stock and Flow Variables Explained: A Closer Look at Apple
The difference between stock and flow variables is an essential concept in finance and economics. We illustrate with financial statements from Apple Inc. 
Investing
Most Common Probability Distributions
In this article, we'll go over a few of the most popular probability distributions and show you how to calculate them. 
Managing Wealth
Variable Annuities: The Pros and Cons
Variable annuities are one of the most complicated financial instrumentsâ€”weighing the pros and cons. 
Investing
Multivariate Models: The Monte Carlo Analysis
This decisionmaking tool integrates the idea that every decision has an impact on overall risk. 
Financial Advisor
Life Insurance: Variable Vs. Variable Universal
Do you know why you might need one policy versus the other? Read on to find out the difference between Variable and Variable Universal life insurance. 
Investing
Consider These Facts Before Choosing a Variable Annuity
Variable annuities do have some benefits, but there are some disadvantages and misconceptions to take into account as well. 
Retirement
How a Variable Annuity Works After Retirement
These investments can provide extra income after you retire. Hereâ€™s a guide to when and how you will receive the payout.

How do fixed costs and variable costs affect gross profit?
Learn about the differences between fixed and variable costs and find out how they affect the calculation of gross profit ... Read Answer >> 
What is the Difference Between Variable Cost and Fixed Cost in Economics?
Learn what total costs are comprised of, what variable costs and fixed costs are, and the main difference between them. Read Answer >> 
What are the differences between absorption costing and variable costing?
Examine the main differences between absorption costing and variable costing, along with the advantages and disadvantages ... Read Answer >> 
How should I interpret a negative correlation?
Learn more about correlation and how businesses analyze variables. Find out how negative correlations are interpreted by ... Read Answer >>