Consider an asset that costs 140 today you are going to hold...

Consider an asset that costs $140 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 $180 in a year. Instructions: In part a, round your answer to 3 decimal places. In parts 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 $150 today. c. At what price would the asset have a zero average expected rate of return?

Transcript

00:01 For part a, we have to find the...

00:05 For part a, we're trying to find the...

00:13 For part a, we're trying to find the average expected rate of return.

00:19 This is going to be given by the following equation.

00:25 It's going to be our expected selling price after a year.

00:30 I'll denote that with xs.

00:36 Minus the cost of the asset on that day, so i'll say that's xc, over the same cost of the asset xc times 100.

00:54 So we'll have all this times 100.

00:58 That will give us the average expected rate of return.

01:03 First, though, we are going to have to find this xs.

01:10 So the xs, so for part a, we're trying to find the average expected rate of return.

01:23 This is going to be given by the following equation.

01:26 It's going to be our expected selling price after one year.

01:32 I'll denote this by xs, minus the cost of the item today, or cost of the asset today, x, c, over.

01:41 That same cost of the item today, xc, then multiply all this by 100.

01:49 So this will give us the average or the expected average rate of return.

01:57 But first, we're just going to have to find this xs.

02:00 We already know that xc is $140, and xs will be given by the sum of the the product of prices given, so we'll say x to the n, times their respective probability, so p n.

02:26 Now we're given three different probabilities and three different prices for each.

02:32 X1 is going to be $100.

02:37 X2 is going to be $130, and then x3 is going to be $170 with our probabilities of each p1 will be 25 or 0 .25.

02:57 P2 is also 0 .25 and p3 is going to be 0 .5.

03:10 Xs is the sum of the prices and their respective probabilities multiplied...

Question

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