Question

Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chance that it will be worth $140 in a year. Instructions: In part a, round your answer to 3 decimal places. In parts band d, round your answers to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is its average expected rate of return? percent b. Next, figure out what the investment's average expected rate of return would be if its current price were $130 today. percent c. Does the increase in the current price increase or decrease the asset's average expected rate of return? Decrease d. At what price would the asset have a zero average expected rate of return? < Prex 1 of 5 Next >

Answer 1

Solution :

As per HomeworkLib guidelines...we should only answers 4 parts to a question..kindly use seprate desks to asks further questions...please like my answer...if its hekps you...

(a) :- Find the expected payoff = 25% x 100 + 25% x 115 + 50% x 140 = 123.75

Hence, the average expected rate of return is (123.75 - 120)*100/120 = 3.125%

(b) :- If the price of the asset is $130, the average expected rate of return is:-

Hence, the average expected rate of return is (123.75 - 130) / 130 = -4.80%

(c) :- It decreases the average expected return as the current price is higher than the expected price of asset found in the part A.

(d) :- For a zero average expected rate of return,

Price = $123.75

At this price, Average expected rate of return = (123.75 – 123.75)/123.75

At Price = $123.75 , Average expected rate of return = 0