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1) Assume you won lottery and had two options: (1) receiving $0.2 million or (2) taking gamble in which at flip of the coin you receive $0.4 million if the head comes up but get zero if a tail comes up.

a) What is the expected value of the gamble?

b) Assume payoff was really $0.2 million - which was the only choice. You now face choice of investing it in the U.S. Treasury bond which will return $217,000 at the ending of the year or a common stock which has a 50-50 chance of being worthless or worth $480,000 at the ending of the year.

2) The expected profit on T-bond investment is= $17,000. Determine expected dollar profit on stock investment?

3) The expected rate of return on T-bond investment is= 8.5%. Determine the expected rate of return on stock investment?

Basic Finance, Finance

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