An investor buys an option on a stock that will return $150 profit if the stock goes up and lose $650 if it goes down. The investor estimates there is a 65% chance the stock will go up.

(a) What is the expected profit for this option? (Enter your answer to two decimal places.)

Question

Business

Bailey Clay

12 March, 12:13

An investor buys an option on a stock that will return $150 profit if the stock goes up and lose $650 if it goes down. The investor estimates there is a 65% chance the stock will go up.

(a) What is the expected profit for this option? (Enter your answer to two decimal places.)

+1

Answers (1)

Know the Answer?

Woody · Answer 1

The answer is expected loss of $130 (-$130)

Explanation:

The percentage that stock will go up is 65%.

Therefore, the percentage that the stock will go down is 100% - 65% = 35%

Value that it will go up is $150 x 65% = $97.5

Value that it will go down is $650 x 35% = $227.5

Expected profit or loss:

$97.5 - $227.5

= - $130

It is an expected loss of $130.

An investor buys an option on a stock that will return $150 profit if the stock goes up and lose $650 if it goes down. The investor estimates there is a 65% chance the stock will go up.(a) What is the expected profit for this option? (Enter your answer to two decimal places.)

An investor buys an option on a stock that will return $150 profit if the stock goes up and lose $650 if it goes down. The investor estimates there is a 65% chance the stock will go up.

(a) What is the expected profit for this option? (Enter your answer to two decimal places.)