What is the expected value of each option

Assignment Help Finance Basics
Reference no: EM132012615

Question: Suppose you have $90 to invest or store in a safe deposit box. Your only alternative to storing is a stock which sells for $90. The stock is an initial public offering for a company with a risky idea that is projected to triple in value in a year if the idea works. The history of such ventures is that 80% of the time they fail and you lose your money. The other 20% of the time they triple your money in a year.

a. What is the expected value of each option at the end of the year? = $54

b. Which option would you take if your utility function for money is u(M) = M2 ? = 14,580 so buy stock

c. Which option would you take if your utility function for money is u(M) = M1/2 ? = 9.49 so money stored

d. Using calculus, characterize your risk preferences (risk adverse, risk lover, or risk neutral) in parts b and c above

Reference no: EM132012615

Questions Cloud

Determine how to pour the chemicals : When I first started my summer job I was told to wear old clothes and shown generally how to pour the chemicals. I was not provided any eye protection.
What is the value of this project : In year 2, depreciation will be $100,000 and earnings are expected to be $209,998. Assume the required return is 9%. What is the value of this project?
How much money does janice need now to fund : Janice believes she can invest her savings at 8% until she depletes her funds. How much money does Janice need now to fund her travels
What is the real risk-free rate of return : On the basis of these data, what is the real risk-free rate of return?
What is the expected value of each option : Suppose you have $90 to invest or store in a safe deposit box. Your only alternative to storing is a stock which sells for $90. The stock is an initial public.
What could you do here to balance the proforma : What could you do here to balance the proforma?
How many pages of text can the tablethold : For a plain textbook, one byte typically corresponds to one character and an average page consists of 2000 characters.
How much will in-line tenants have to pay per square foot : CAM charges for retail leases in a shopping mall must be calculated. The retail mall consists ofa total area of 2.8 million square feet, of which 800,000 square
Analyze the challenges and opportunities : Considering the McGuigan article, analyze the challenges and opportunities that you as an administrator would encounter in employing Web-based applications.

Reviews

Write a Review

Finance Basics Questions & Answers

  Explain leverage analysis of capital budgeting decisions

Explain Leverage analysis of capital budgeting decisions and show how you could generate exactly the same cash flows and rate of return by investing in Firm A and using homemade leverage

  Calculate the cost of the marginal investment

Calculate the cost of the marginal investment in accounts receivable. Should the firm implement the proposed change? What other information would be helpful in your analysis?

  How much cash would be freed-up

Its cost of goods sold is 75% of sales, and it finances working capital with bank loans at an 8% rate. Assume 365 days in year for your calculations.

  Why do we develop alternative physical designs

Describe two situations in which you would use each of the following techniques: internal literature review, interview, internal presentation, observation, walkthrough, database and files review, and questionnaire.

  A young couple need your help to build

A young couple need your help to build their retirement fund. They recently received a tax free lump sum for $100,000 as their wedding gift. They are about 30 years each and have enough discretionary income no to worry about the market fluctuations i..

  Exercise the option before maturity

A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity?

  Use the excel function yield

A.Use the Excel function "Yield" to answer the following question. (carry your answer to two decimal places).Based on the following bond data the yield to maturity is 4.17%.

  Design and conduct if possible an archival research study

Design an observational study of your own, including the creation of a set of behavioral categories that would be used to code for one or more variables of interest to you.

  Determining the inventory turnover ratio

1. Why would an inventory turnover ratio be more important for a retailer than a consulting firm?

  What is the expected rate of return on a portfolio

What is the expected rate of return on a portfolio? How is it calculated? Is there another (i.e. on alternative) way to calculate this?

  What must be the beta on company stock

According to the CAPM, the required return on Company A's equity should be 12.3%. The risk-free rate of return is 4.5%, and the expected return.

  Show that the market price of the put is greater

Suppose that you are comparing put and call prices on the same underlying stock and the strike prices and time-to-expiration of the two options match.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd