Today, You Are Buying a One-Year Call on One Share

question 440

Multiple Choice

Today, you are buying a one-year call on one share of Hi-Lo stock with a strike price of $40 along with a one-year risk-free asset that pays 4.5 percent interest. The cost of the call is $1.10 and the amount invested in the risk-free asset is $38.28. How much profit will you earn if the stock price is $38 a share at the end of the year?

• A) -$1.38
• B) -$.69
• C) $0
• D) $.62
• E) $1.24

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Definitions:

Central Limit Theorem

A principle stating that the distribution of sample means approaches a normal distribution as the sample size becomes larger, regardless of the population's distribution.

Standard Errors

A statistical term that describes the estimated standard deviation of a sampling distribution of a statistic, often used in hypothesis testing.

Sample Means

The average value derived from a subset of a larger population, used as an estimate of the overall population mean in statistical analysis.

Subjective Sampling

A sampling technique where the samples are selected based on the judgment of the researcher, rather than using random selection methods.