STAT. TECH. IN BUSINESS + ECON LOOSELEAF
18th Edition
ISBN: 9781264261765
Author: Lind
Publisher: MCG
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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.
Expert Solution & Answer
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:
| Payoff value | Probability | Expected value | |
| Bull market | 2,200 | 0.60 | |
| Bear market | 1,100 | 0.40 | |
Then, the expected payoff for the act of purchasing Rim Homes stock is obtained by adding the
Thus, the expected payoff for the act of purchasing Rim Homes stock is $1,760.
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