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Unformatted text preview: 2 0.25 (0) 0.75 (1,120) 840 The price today should be: 2 96 840 781.49 1.10 1.10 P At the end of two years, the following cash flows and probabilities exist: Probability Final Cash Flow Holding Period Return Prob HPR Prob (HPR Exp. HPR) 2 0.2 $ 0.00 100.00% 20.00% 19.80% 0.2 $ 132.00 83.11% 16.62% 13.65% 0.6 $1,252.00 60.21% 36.12% 22.11% 0.50% 55.56% The expected holding period return is almost zero ( 0.5%). The standard deviation is roughly 74.5% [the square root of 55.56%]. Note that this solution key is somewhat brief  if you would like a more elaborate explanation as to how to solve this problem, feel free to email me or come to office hours and I will be happy to explain in more detail if you are confused. Thanks, Lauren...
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.
 Summer '08
 VD

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