# Demand

### Practice Problems

Problem : Company A and Company B are both selling stock at \$1 a share. If risk-neutral Kenny wants to buy stock in either Company A or Company B, and he thinks that the possible future values for Company A's stock are \$0, \$1, \$5, and \$20, with respective probabilities of 20%, 50%, 20%, and 10%, and that the possible future values of B's stock are \$0, \$1, \$10, and \$100, with respective probabilities of 50%, 30%, 15%, and 5%, which stock will he pick?

Problem : Which of the following are high risk investments, and which are low risk?

Gold
Stocks in new companies
IRA's
Savings bonds
Lottery tickets

Problem : What is the expected value of a stock whose possible future values are \$0, \$1, \$10, and \$60 with respective probabilities of 25%, 50%, 20%, and 5%?

Problem : If the current price of a stock is \$7 a share, will risk-neutral Andy buy any stock if he believes that the possible future values are \$0, \$2, \$5, \$10, and \$50, with respective probabilities of 10%, 15%, 50%, 20%, and 5%?

Problem : What is the maximum price that risk-neutral Tamara will be willing to pay for a stock which she believes has possible future values of \$0, \$5, \$10, and \$200, with respective probabilities of 50%, 25%, 24%, and 1%?

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## The Book

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