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?

Question

Quizplus · Accepted Answer

The expected return is calculated as (0.3 * ($30 - $15)/$15) + (0.7 * ($10 - $15)/$15) = 6.67%. The variance is calculated using the formula for variance of a discrete random variable, resulting in 37.33%.

You Are Considering Buying a Share of Stock in a Firm