Consider an asset that costs $130 today. You are going to hold it for 1 year and then sell

Consider an asset that costs $130 today. You are going to hold it for 1 year and then sell

Consider an asset that costs $130 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 $100 in a year, a 25 percent chance that it will be worth $120 in a year, and a 50 percent chance that it will be worth $160 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 $140 today.

 

 

c. Does the increase in the current price increase or decrease the asset’s average expected rate of return?

 

(Click to select) Decrease Increase

 

d. At what price would the asset have a zero average expected rate of return?

 

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