Cumulative risk profiles for the three alternatives

Reference no: EM13995695

A stock market investor has $500 to spend and is considering purchasing an option con tract on 1000 shares of Apricot Computer. The shares themselves are currently selling for $28.50 per share. Apricot is involved in a lawsuit, the outcome of which will be known within a month. If the outcome is in Apricot's favor, analysts expect Apricot's stock price to increase by $5 per share. If the outcome is unfavorable, then the price is expected to drop by $2.75 per share. The option costs $500, and owning the option would allow the investor to purchase 1000 shares of Apricot stock for $30 per share. Thus, if the investor buys the option and Apricot prevails in the lawsuit, the investor would make an immedi ate profit. Aside from purchasing the option, the investor could (1) do nothing and earn about 8% on his money, or (2) purchase $500 worth of Apricot shares.

a Construct cumulative risk profiles for the three alternatives, assuming Apricot has a 25% chance of winning the lawsuit. Can you draw any conclusions?

b If the investor believes that Apricot stands a 25% chance of winning the lawsuit, should he purchase the option? What if he believes the chance is only 10%? How large does the probability have to be for the option to be worthwhile?

Reference no: EM13995695

Questions Cloud

Problem regarding the decision-analysis course : There are so many issues to think about, however, that he has a difficult time keep ing them all straight. After hearing about your decision-analysis course, he asks you whether you have learned anything that might help him in his decision. What k..

Find the forces that the walls a and b exert on the beam : A 20.0-m -long uniform beam weighing 640 N rests on walls A and B. Find the forces that the walls A and B exert on the beam when the person is standing at a point 3.3 m to the right of B.

Innovative new food processor : Johnson Marketing is interested in producing and selling an innovative new food processor. The decision they face is the typical "make or buy" decision often faced by manufacturers. On one hand, Johnson could produce the processor itself, subcontr..

Prepare the appropriate journal entry for each transaction : Prepare the appropriate journal entry for each transaction or event during 2011, including the closing entry to income summary for the year.

Cumulative risk profiles for the three alternatives : Construct cumulative risk profiles for the three alternatives, assuming Apricot has a 25% chance of winning the lawsuit. Can you draw any conclusions?

What is the probability that exactly one is being deceptive : A federal report find that a lie detector test given to truthful persons have a probability of 0.2 of suggesting that the person is deceptive. What is the probability that exactly one is being deceptive

Calculate the altitude h of the satellite : Consiter the satellite in geostationary orbit at a constant speed. Is it accelerating? If YES, calculate the geostationary satellite in magnitude of the acceleration.

What magnetic field halfway between inner and outer radii : A toroid is made with 2650 turns of wire. The inner radius is 11.3 cm, the outer radius is 14.1 cm. What is the magnetic field halfway between the inner and the outer radii inside the toroid if the electric current flowing through the wire of the ..

Journal entry for each transaction or event : Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division.

User Account

All Pages