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Chapter 4: Q4.2-1E (page 224)

Suppose that the return R (in dollars per share) of a stock has a uniform distribution on the interval [鈭�3, 7]. Suppose also that each share of the stock costs $1.50. Let Y be the net return (total return minus cost) on an investment of 10 shares of the stock. Compute E(Y ).

Short Answer

Expert verified

EY = 5 dollars.

Step by step solution

01

Given information

The return R of a stock R (in dollars per share) has a uniform distribution on the interval [-3,7]. The cost of each share is $1.50.

Y denotes net return on investment of 10 shares of the stock.

02

Compute E(Y)

The expected return of each stock is $2 as the return of stock follows a uniform distribution, so the mean is 0.5 (-3+7) = 2

The cost of each stock is $1.50

So, net return is $2-$1.50 = $0.5 for each stock

So, E(Y)=\(0.5 \times 10 = 5\)dollars.

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