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Suppose that you are trying to decide whether to spend ​$5,000 on stock issued by WildWeb or on a bond issued by

the same company. There is a 30 percent chance that the value of the stock will rise to ​$11,000 at the end of the year and a 70 percent chance that the stock will be worthless at the end of the year. The bond promises an interest rate of 25 percent per​ year, and it is certain that the bond and interest will be repaid at the end of the year.

Assuming that your time horizon is exactly one​ year, will you choose the stock or the​ bond? ▼

 

Top Answer

The expected value of stock at the end of one year is [(.30) *11000 + (.70) x0]... View the full answer

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