Consider a market that can follow just two scenarios, boom or recession. The current share price of
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Consider a market that can follow just two scenarios, boom or recession. The current share price of a certain stock is $10, which may rise to $12 after one year if there is a boom or come down to $7 in the case of recession. The market currently estimates the probability of recession at 5%. What is the expected return of the stock? The variance of the return? What if the probability of recession increases to 40%
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