Suppose you have $200 with which you can buy shares of stock from two companies:

Question

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase two shares of ABC stock and no shares of XYZ stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______.

1) 50%, $0

2) 25%, $20

3) 75%, $30

4) 50%, $20

Explanation / Answer

The correct answer is options 1. , 1) 50%, $0

Total $200 abc 100 xyz 100 temp low abc inc by 20 120 50% temp high xyz inc by 20 120 25% abc 200 50% 140

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