Two companies, Rothko, LLC, and Calder & Co., are racing each other to be the fi

Question

Two companies, Rothko, LLC, and Calder & Co., are racing each other to be the first to apply new deep-water drilling technologies to an oil deposit. If Rothko, LLC gets to the oil first, its stock will increase by 63%, and Calder & Co.'s stock price will not change at all. If Calder & Co. get to the oil deposit first, its stock price will increase by 37%, and Rothko's stock price won't change at all. These are the only two companies trying to tap the deposit. The chance that Calder & Co. arrives first is 63%. NOTE: All answers should be to two decimal places. What is the expected payoff of investing $1000 in Rothko, LLC?

What is the expected payoff of investing the same amount in Calder & Co.?

What is the expected payoff of investing $500 in Calder & Co. and $500 in Rothko, LLC?

Explanation / Answer

Ans

Expected pay off of investing 1000 in Rothko,LLC= probability of getting oil stock *increase in value ofstock= .37* 63% of 1000

= .37*630= 233.1

Similarly

Expected pay off of investing 1000 in Calder & co = .63* 37% of 1000= .63* 370= 233.1

Of investing 500 in each

Expected pay off= .37 * 63% of 500 + .63* 37% of 500

= .37* 315 + .63* 185= 233.1

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