Sassafras Oil is staking all its remaining capital on wildcat exploration off the Cote d'Huile. There is a 10% chance of discovering a field with reserves of 50 million barrels. If it finds oil, it will immediately sell the reserves to Big Oil at a price depending on the state of the economy. Thus the possible payoffs are as follows:

Is Sassafras Oil a risky investment for a diversified investor in the stock market-compared, say, to the stock of Leaning Tower of Pita, described in Problem 15? Explain.

Transcribed Image Text:

Value of Reserves, per Barrel $4 Value of Reserves 50 Million Barrels $200,000,000 250,000,000 300,000,000 Value of Dryholes Boom Normal economy Recession