Thanks for this TechGuru. I have seen probabili

Thanks for this TechGuru.

I have seen probability models that look like this:

Quote:

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An investment has a 10% chance of a 100% return and a 90% chance of a 50% return. The expected return is calculated as:

Expected Return = 0.1(1) + 0.9(0.5) = 0.55 = 55%.

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In your example using dollars, I understand the notion that the resulting number is positive vs. negative, and that a positive number suggests a more actionable investment.

However, I don't understand the relevance of 1.5 in a dollar denomination, and how that number suggests the relative strength of an investment decision.

For example, here is your equation with different assumptions plugged in (I personally think these values are more realistic over the next 3-6 months if COVID is approved.):

Upside of $20, Current Price of $3.1, Downside of $1.2, Probability of 80%.

When I run the calculation using these numbers I get 12 dollars vs. your 1.5 dollars.

Question:

What is the proper way to interpret (or equate) 1.5 dollars in your example vs. 12 dollars in my example?

I get that a higher positive number suggests stronger conviction versus a smaller positive number -- but I think I'm missing a fundamental understanding of what the resulting dollar denominated number actually means.

I don't want to waste your time on it , but a very short answer would be appreciated.

Thanks