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28 March, 21:15

Two companies, Rothko, LLC, and Calder & Co., are racing each other to be the first to apply new deep-water drilling technologies to an oil deposit. If Rothko, LLC gets to the oil first, its stock will increase by 63%, and Calder & Co./'s stock price will not change at all. If Calder & Co. get to the oil deposit first, its stock price will increase by 37%, and Rothko/'s stock price won/'t change at all. These are the only two companies trying to tap the deposit.

The chance that Calder & Co. arrives first is 63%.

NOTE: All answers should be to two decimal places.

1. What is the expected payoff of investing $1000 in Rothko, LLC?2. What is the expected payoff of investing the same amount in Calder & Co.?3. What is the expected payoff of investing $500 in Calder & Co. and $500 in Rothko, LLC?

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Answers (1)
  1. 28 March, 21:34
    0
    Consider the following calculations

    Explanation:

    Expected pay off of investing 1000 in Rothko, LLC = probability of getting oil stock * increase in value ofstock=.37 * 63% of 1000

    =.37*630 = 233.1

    Similarly

    Expected pay off of investing 1000 in Calder & co =.63 * 37% of 1000=.63 * 370 = 233.1

    Of investing 500 in each

    Expected pay off=.37 * 63% of 500 +.63 * 37% of 500

    =.37 * 315 +.63 * 185 = 233.1
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