Macroeconomics + Economy 2009 Update 18th Edition by Campbell McConnell, Sean Masaki Flynn,Stanley Brue

Exercise 22

Consider an asset that costs $120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth $100 in a year, a 25 percent chance that it will be worth $115 in a year, and a 50 percent chance that it will be worth $140 in a year. What is its average expected rate of return Next, figure out what the investment's average expected rate of return would be if its current price were $130 today. Does the increase in the current price increase or decrease the asset's average expected rate of return At what price would the asset have a zero rate of return