5) (3 points) Recall the friend who offered a bet on Apple stock in the first...

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5) (3 points) Recall the friend who offered a bet on Apple stock in the first assignment? She is back with a new offer. She still believes that Apple stock is overvalued. She does not believe that the stock price, now at $140 per share, will go up further, and is offering you the following bet. If in exactly one year from now Apple stock price is higher than $140/share, she will give you two hundred times the amount of the difference (e.g., suppose the price in one year is $145 per share, you will get $1,000). On the other hand, if the price in one year ends up below $140/share, you will have to give her only one hundred times the amount of the difference (e.g., suppose the price in one year is $137 per share, you will have to give her $300). Suppose that the expected return on Apple stock is 10% p.a., and its volatility is 25% p.a. Suppose also that the current risk-free rate is 2% p.a. and Apple does not plan to pay dividends next year. What is the value of this bet to you? 5) (3 points) Recall the friend who offered a bet on Apple stock in the first assignment? She is back with a new offer. She still believes that Apple stock is overvalued. She does not believe that the stock price, now at $140 per share, will go up further, and is offering you the following bet. If in exactly one year from now Apple stock price is higher than $140/share, she will give you two hundred times the amount of the difference (e.g., suppose the price in one year is $145 per share, you will get $1,000). On the other hand, if the price in one year ends up below $140/share, you will have to give her only one hundred times the amount of the difference (e.g., suppose the price in one year is $137 per share, you will have to give her $300). Suppose that the expected return on Apple stock is 10% p.a., and its volatility is 25% p.a. Suppose also that the current risk-free rate is 2% p.a. and Apple does not plan to pay dividends next year. What is the value of this bet to you?

Answer rating: 100% (QA)

R isk free rate R f 2 p a Ex pected return on Apple stock R m 10 p a Vol atility of Apple ... View the full answer