Suppose you have 200 with which you can buy shares of stock

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

Solution

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