Consider a wager that will pay either $55 or $20, with equal probability.

a. Calculate the mean and standard deviation of the expected payoff.

b. If the cost of the wager is $35, calculate the expected return and the standard deviation of

holding period returns. What if the cost of the wager is $30?

c. Now assume the risk free rate is 3.0 percent, the market risk premium is 6.5 percent, the

standard deviation of holding period returns of the market portfolio is 18 percent, and the

correlation between the payoff of the bet and the return you could earn by investing in the

market portfolio is 0.4. Use the CEQ approach and Equation 9.8 to compute the PV of the wager.

d. What is the NPV of the wager if it is acquired for $30?

e. What is the correct risk adjusted discount rate for this wager?