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 percent chance that it will be colder than average next year, and a 25 percent 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

This problem requires finding the expected value of your investment. Expected value of one share of ABC equals: $120 (0.50)+ $100 (0.25)+ $100 (0.25)= $110. Expected value of one share of XYZ equals $100 (0.50)+ $120 (0.25)+ $100 (0.25)= $105. Your capital gain per share is $10 and $5, respectively, for $15 total.

Suppose You Have $200 with Which You Can Buy Shares