EBK STATISTICAL TECHNIQUES IN BUSINESS
EBK STATISTICAL TECHNIQUES IN BUSINESS
17th Edition
ISBN: 9781259924163
Author: Lind
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 20, Problem 1SR
To determine

Prove that the expected payoff for the act of purchasing Rim Homes stock is $1,760.

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Answer to Problem 1SR

The expected payoff for the act of purchasing Rim Homes stock is $1,760.

Explanation of Solution

From the Table 20-1, the bull market and bear stock for the Rim homes are 2,200 and 1,100, respectively. The corresponding probabilities are 0.60 and 0.40.

The expected payoff for the act of purchasing Rim Homes stock is calculated as follows:

EventPayoff valueProbabilityExpected value
Bull market2,2000.602,200×0.60=1,320
Bear market1,1000.401,100×0.40=440
   Total=1,320+440=1,760

Then, the expected payoff for the act of purchasing Rim Homes stock is obtained by adding the expected values 1,320 and 440. That is, 1,320+440=1,760.

Thus, the expected payoff for the act of purchasing Rim Homes stock is $1,760.

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