Suppose you learn of a gamble in which your $1 investment (current price of investment) can either grow to $5 with 10% chance or decline to 50 cents with 90% chance. Assuming the risk-free rate to be zero what are the natural and risk-neutral probabilities that you will gain $5?

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To find the natural and riskneutral probabilities of gaining 5 we can u... View the full answer