# How much, on average, do you expect to gain by investing \$4,120 in the following stock: To buy the stock, you have to pay a \$120 non-refundable…

1. How much, on average, do you expect to gain by investing \$4,120 in the following stock: To buy the stock, you have to pay a \$120 non-refundable service charge. There is a 50% chance that the firm will be bought by a large computer firm next year. If that is the case, there is a 40% chance that the stock holders will be bought out at double the present stock price, and a 60% chance that the stock holders will be bought out at 150% of the present stock price. If the firm is not bought by the large company, there is a 50% chance that the firm’s stock value will stay the same, and a 50% chance that the firm will go broke. If the firm goes broke, its stock will be totally worthless.

2. If you have a 50% chance to win \$600 and 50% chance to lose \$100, your expected value is?

3. If you have a 50% chance to win \$600 and 50% chance to lose \$100, your expected value is?

4. On the average, how much would you expect to win by playing the following game?A 60% chance to win \$2000 and a 40% chance to lose \$1000

5. Chris, a small business owner, has identified a store site in a shopping mall in Atlanta. The mall owner offered him to alternatives: one location with 10,000 square feet and the other with 15,000 square feet. If he chooses the larger space, he estimates that the store will make a \$200,000 annual profit when the economy is strong. However, if the economy is normal or poor, the profit will be only \$100,000 or \$40,000 respectively. With the smaller store, he estimates the annual profit at \$150,000 with a good economy, \$100,000 with a normal one and \$50,000 with a poor one. Economists predict that there is a 10% probability of a boom, an 80% chance of a normal economy, and a 10% chance of a poor one in the coming year. Which alternative is better for Chris to maximize his store profit?

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