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 $50.00.You forecast that there is a 40% chance that the stock will sell for $70.00 at the end of one year.The alternative expectation is that there is a 60% chance that the stock will sell for $30.00 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 percentage return is calculated as the weighted average of possible returns: (0.4 * (70-50)/50) + (0.6 * (30-50)/50) = -8.00%. The variance is calculated using the formula for variance of a discrete random variable, resulting in 15.36%.

You Are Considering Buying a Share of Stock in a Firm