Problem 1 (A Coin-Flip financial instrument) Consider the following financial instrument: You buy 1 share of such a financial instrument from me (the dealer) on Jan. 1.2014 On Dec. 31, 2014, I will flip a fair coin. How much money you will get from me is described by the following table: . . . Outcomes of coin-flip Head (prob=0.5) Tail (prob=0.5) or bet between you and me outcome of the clapends on market condition filte CF=$500 CF=.$500 result of con Macro-economic outcomes CF=$250 CF=-$250 Boom prob.=0.36 Stagnant prob. -0.48 recession prob =0/16 CF $0 CF=$0 e.g. if the economy is booming, and if we obtain a head from the coin-flip, a your cash flow will be $500, i.e. I will pay you $500. (a) Compute the expected cash flow (i.e. the expected amount of money you will be paid on Dec. 31, 2014 (b) Compute the standard deviation of the cash flow. Problem 1 (A Coin-Flip financial instrument) Consider the following financial instrument: You buy 1 share of such a financial instrument from me (the dealer) on Jan. 1.2014 On Dec. 31, 2014, I will flip a fair coin. How much money you will get from me is described by the following table: . . . Outcomes of coin-flip Head (prob=0.5) Tail (prob=0.5) or bet between you and me outcome of the clapends on market condition filte CF=$500 CF=.$500 result of con Macro-economic outcomes CF=$250 CF=-$250 Boom prob.=0.36 Stagnant prob. -0.48 recession prob =0/16 CF $0 CF=$0 e.g. if the economy is booming, and if we obtain a head from the coin-flip, a your cash flow will be $500, i.e. I will pay you $500. (a) Compute the expected cash flow (i.e. the expected amount of money you will be paid on Dec. 31, 2014 (b) Compute the standard deviation of the cash flow