Unformatted text preview: To find out the expected value (EV) of the stock, multiply the probability of each event by the value of each event, and sum the results: EV = (0.125)(20) + (0.5)(5) + (0.375)(0) EV = $5 a share We find that Jevan expects the stock to be worth about $5, based on his assumptions about company performance. What this means is that Jevan will not be willing to pay more than $5 a share for this stock, since he believes it to be worth $5 a share. He will probably be willing to buy stock if the price is lower than $5, depending on how much he enjoys taking risks. How would we explain it if the price is lower than $5, but Jevan decides not to buy any stock? We know that he believes the stock to be worth $5, so we would expect him to buy stock if it is priced lower than $5 a share. This can be explained by Jevan's openness to taking risks. Because the future price of the stock is uncertain, and Jevan's openness to taking risks....
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This note was uploaded on 12/13/2011 for the course ECO 1320 taught by Professor Staff during the Fall '11 term at Texas State.
- Fall '11