Suppose that the stock prices in the following three scenarios are
|
Scenario |
S(0) |
S(1) |
S(2) |
|
?1 |
100 |
110 |
120 |
|
?2 |
100 |
105 |
100 |
|
?3 |
100 |
90 |
100 |
with probabilities 1/4, 1/4, 1/2, respectively. Find the expected returns E(K(1)), E(K(2)) and E(K(0,2)). Compare 1 + E(K(0,2)) with (1 + E(K(1)))(1 + E(K(2))).