Suppose you won the lottery and had two options: (1) receiving $0.6 million or (2) taking a gamble in which, at the flip of a coin, you receive $1.2 million if a head comes up but receive zero if a tail comes up.Suppose the payoff was actually $0.6 million - that was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $633,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,380,000 at the end of the year.The expected profit on the T-bond investment is $33,000. What is the expected dollar profit on the stock investment? Round your answer to the nearest dollar.The expected rate of return on the T-bond investment is 5.5%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.Would you invest in the bond or stock?Exactly how large would the expected profit (or the expected rate of return) have to be on the stock investment to make you invest in the stock, given the 5.5% return on the bond? Round your answer to the nearest whole number. If no exact answer can be obtained, enter 0.

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EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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Suppose you won the lottery and had two options: (1) receiving $0.6 million or (2) taking a gamble in which, at the flip of a coin, you receive $1.2 million if a head comes up but receive zero if a tail comes up.

Suppose the payoff was actually $0.6 million - that was the only choice. You now face the choice of investing it in a U.S. Treasury bond that will return $633,000 at the end of a year or a common stock that has a 50-50 chance of being worthless or worth $1,380,000 at the end of the year.

The expected profit on the T-bond investment is $33,000. What is the expected dollar profit on the stock investment? Round your answer to the nearest dollar.
The expected rate of return on the T-bond investment is 5.5%. What is the expected rate of return on the stock investment? Round your answer to the nearest whole number.
Would you invest in the bond or stock?
Exactly how large would the expected profit (or the expected rate of return) have to be on the stock investment to make you invest in the stock, given the 5.5% return on the bond? Round your answer to the nearest whole number. If no exact answer can be obtained, enter 0.

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