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 one share of ABC stock and one share of XYZ stock, your expected gain will be _______.

Question

Quizplus · Accepted Answer

The expected gain is the sum of the products of the possible gains and their probabilities. The possible gains are $20, $0, $0, and $20, and the probabilities are 0.5, 0.25, 0.25, and 0.5, respectively. Therefore, the expected gain is (20 * 0.5) + (0 * 0.25) + (0 * 0.25) + (20 * 0.5) = $15.

Suppose You Have $200 with Which You Can Buy Shares