Suppose that the current price of a non-dividend paying stock is So = 20 and that you believe that the stock will go up to ST = 30 or down to ST 15 with equal probability. There is also a European call on the stock with strike K 20 priced at Co = 2. = (a) You consider one of the two following investments: 1) All in the stock 2) All in the call Formally show which investment strategy has more risk. (Assume for simplicity that one call entitles you to purchase one stock). (b) Suppose you decide to invest $1 million. What are the profit/losses associated with these two strategies?

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.