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Unformatted text preview: 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 estimate is only an estimate, if Jevan doesn't like taking risks, that is, if he is risk-averse, then he may choose not to buy any stock, even if the expected returns are positive; he is...
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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