Imagine that the investor in Exercise 37 invests +10,000 for one month in a company whose stock either goes up by 80% after a month with probability
or drops 60% with probability
. After one month, the investor sells this stock and uses the proceeds to buy stock in a second company. Let the random variable Y denote the value of the $10,000 investment after two months.10
(a) Find the probability distribution of
.
(b) Find the mean value of
.
(c) Does the mean value represent the experience of the typical investor?
Exercise 37
An investor buys the stock of two companies, investing $10,000 in each. The stock of each company either goes up by 80% after a month (rising to $18,000) with probability
or drops by 60% (falling to $4,000) with probability
. Assume that the changes in each are independent. Let the random variable
denote the value of the amount invested after one month.
(a) Find the probability distribution of
.
(b) Find the mean value of
.
(c) Does the mean value represent the experience of the typical investor?