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 one share of ABC stock and one shares of XYZ stock, there is a ______ chance that your gain will be $20. Otherwise, your gain will be ______.

Question

Quizplus · Accepted Answer

There is a 50% chance of colder weather (gain $20 from ABC) and a 25% chance of warmer weather (gain $20 from XYZ), totaling a 75% chance of a $20 gain. If neither happens (25% chance), the gain is $0.

Suppose You Have $200 with Which You Can Buy Shares