You are considering buying a share of stock in a firm that has the following two possible payoffs with the corresponding probability of occurring. The stock has a purchase price of $15.00
You forecast that there is a 30% chance that the stock will sell for $30.00 at the end of one year. The alternative expectation is that there is a 70% chance that the stock will sell for $10.00 at the end of one year. What is the expected percentage return on this stock, and what is the return variance?
A) 6.67%, 9.17%
B) 1.00%, 93.50%
C) 6.67%, 37.33%
D) 84.00%, $9.67
Answer: C
Explanation: C) Expected payoff = Σ Expected payoffi × probabilityi = .30 ∗ $30.00 + .70 ∗ $10 = $16.00.
E(r) = = = 6.67%
Variance = (0.30)(1.00 - 0.0667)2 + (0.70)(-0.333 - 0.0677)2 = 0.377, or 37.33%.
You might also like to view...
________ is NOT a commonly used contractual hedge against foreign exchange transaction exposure
A) Forward market hedge B) Money market hedge C) Options market hedge D) All of the above are contractual hedges.
Which best describes what the history section of a statement of work does?
A) It provides a description of the broad requirements of the database project B) It provides a complete history of the company C) It provides backgrounds on the people involved in the project D) It provides a background for the issues and problems that led to the decision to develop a new database