Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade.Each company's stock currently sells for $100 per share.If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change.If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change.There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average.If you purchase two shares of ABC stock and no shares of XYZ stock, your expected gain will be ______.

Question

Quizplus · Accepted Answer

The expected gain is calculated by considering the probability of each scenario and the corresponding gain. With a 50% chance of colder weather, the gain is $40 (2 shares * $20 increase), and with a 25% chance of warmer weather, the gain is $0. The expected gain is (0.5 * $40) + (0.25 * $0) = $20.

Suppose You Have $200 with Which You Can Buy Shares