23. Specific versus Market Risk. Sassafras Oil is staking all its remaining capital on wildcat exploration...

Transcribed Image Text:

23. Specific versus Market Risk. Sassafras Oil is staking all its remaining capital on wildcat exploration off the Cte d'Huile. There is a 10% chance of discovering a field with reserves of 50 million barrels. If it finds oil, it will immediately sell the reserves to Big Oil at a price depending on the state of the economy. Thus, the possible payoffs are as follows: Boom Normal economy Recession Value of Reserves per Barrel $4 5 6 Value of Reserves (50 Million Barrels) $200,000,000 250,000,000 300,000,000 Value of Dryholes 0 Is Sassafras Oil a risky investment for a diversified investor in the stock market-compared, say, with the stock of Leaning Tower of Pita, described in Problem 15? Explain. (LO11-4) 23. Specific versus Market Risk. Sassafras Oil is staking all its remaining capital on wildcat exploration off the Cte d'Huile. There is a 10% chance of discovering a field with reserves of 50 million barrels. If it finds oil, it will immediately sell the reserves to Big Oil at a price depending on the state of the economy. Thus, the possible payoffs are as follows: Boom Normal economy Recession Value of Reserves per Barrel $4 5 6 Value of Reserves (50 Million Barrels) $200,000,000 250,000,000 300,000,000 Value of Dryholes 0 Is Sassafras Oil a risky investment for a diversified investor in the stock market-compared, say, with the stock of Leaning Tower of Pita, described in Problem 15? Explain. (LO11-4)