Consider a Stock with a 50 Percent Probability of Zero

question 327

Multiple Choice

Consider a stock with a 50 percent probability of zero net earnings and a 50 percent probability of net earnings equal to $20 per share each year continuously in the future. Furthermore, assume that people are risk averse. That is, they will have to be compensated for uncertainty accompanying variation in their future wealth. If the interest rate were 5 percent, how much would people be willing to pay for a share of this stock?

• A) $10
• B) $200
• C) less than $200
• D) more than $200
• E) $400

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Definitions:

Line Segment QR

A part of a line that is bounded by two distinct end points, Q and R, and contains every point on the line between Q and R.

Unemployed Resources

Factors of production that are available for use but are not currently engaged in the production of goods or services.

Keynesian Model

An economic theory stating that government intervention through fiscal policies is necessary to moderate the boom and bust cycles of an economy.

Horizontal Range

In the context of data visualization or statistical analysis, it refers to the span or extent of values along the horizontal axis, typically representing time or categories.