1. What is Expected Value?

The expected value (EV) is a fundamental concept in probability that represents the average outcome if an experiment is repeated many times. For certificates of deposit, it helps evaluate the potential returns considering different possible outcomes and their probabilities.

2. How Does the Calculator Work?

The calculator uses the expected value formula:

Where:

• \( payout \) — The monetary value of each possible outcome
• \( probability \) — The likelihood of each outcome occurring (between 0 and 1)

Explanation: The formula multiplies each possible payout by its probability and sums all these products to get the expected value.

3. Importance of Expected Value Calculation

Details: Calculating expected value helps investors compare different CD options, assess risk, and make informed decisions about where to place their money for optimal returns.

4. Using the Calculator

Tips: Enter at least one payout-probability pair. You can add up to three pairs. Probabilities must be between 0 and 1, and payouts should be positive values.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between expected value and actual return?
A: Expected value is a theoretical average, while actual return is what you actually get from a specific investment.

Q2: How many payout-probability pairs should I enter?
A: Enter all possible outcomes you want to consider. For simple CDs, one pair might suffice. For more complex products, use multiple pairs.

Q3: Should probabilities sum to 1?
A: Ideally yes, but the calculator will work regardless. Results are most meaningful when probabilities sum to 1.

Q4: Can I use this for other investments?
A: Yes, the expected value concept applies to any probabilistic financial decision, though this calculator is designed with CDs in mind.

Q5: What if I have more than three possible outcomes?
A: You can either combine similar outcomes or perform multiple calculations and sum the results.