An investor has to choose between stocks A&B,each selling for $10.Stock A,can either increase in price to $12,with a 50% probability or stay at $10 with a 50% probability.Stock B can either increase in price to $15 with a 50% probability or go down to $7 with a 50% probability.Which of the stocks would the investor choose
A)Stock A
B)Stock B
C)None of the stocks
D)The investor would exit the market

Question

An investor has to choose between stocks A&B,each selling for $10.Stock A,can either increase in price to $12,with a 50% probability or stay at $10 with a 50% probability.Stock B can either increase in price to $15 with a 50% probability or go down to $7 with a 50% probability.Which of the stocks would the investor choose​
A)​Stock A
B)Stock B
C)None of the stocks
D)​The investor would exit the market

Quizplus · Accepted Answer

The expected value of Stock A is higher than that of Stock B. For Stock A, the expected value is $11 (0.5 * $12 + 0.5 * $10), while for Stock B, it is $11 as well (0.5 * $15 + 0.5 * $7). However, Stock A offers a no-loss scenario which is less risky compared to Stock B, which can decrease in value.

An Investor Has to Choose Between Stocks A&B,each Selling for $10.Stock