Consider an asset that costs $130 today. You are going to hold it for 1 year...

Consider an asset that costs $130 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $90 in a year, a 25 percent chance that it will be worth $130 in a year, and a 50 percent chance that it will be worth $160 in a year.

Instructions: In parts a, b, and d round your answers to 2 decimal places. If you are entering any negative numbers, be sure to include a negative sign (-) in front of those numbers.

a. What is its average expected rate of return?

b. Next, figure out what the investment’s average expected rate of return would be if its current price were $140 today.

c. Does the increase in the current price increase or decrease the asset’s average expected rate of return?

Increase or Decrease

d. At what price would the asset have a zero average expected rate of return?

Solutions

Expert Solution

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Rahul Sunny answered 1 year ago

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