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 two shares of XYZ stock and no shares of ABC stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______.

Question

Quizplus · Accepted Answer

There is a 25% chance it will be warmer than average, leading to a $40 gain with XYZ. Otherwise, the gain is $0.

Suppose You Have $200 with Which You Can Buy Shares