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Suppose that the price of some good has increased by 30% each year for the past few years. Atthis point, Bob's pretty sure that the
Suppose that the price of some good has increased by 30% each year for the past few years. Atthis point, Bob's pretty sure that the good is overpriced (the current price is $10,000, but he doesn't think it is actually worth more than $3,000). However, Bob thinks that there is a 90% chance that the price will increase by 30% this year, with a 10% chance that the price falls back to $3,000. If Bob's expectations are correct, what is the expected return (in percent terms) from investing in the good? (Be sure to include a negative sign if the number is negative.) Number If Bob is risk-neutral and could expect a 8% return if he invested in the stock market, will he invest in the good or the stock market? O O O He'll invest in the good. He's indifferent between investing in the two. There's not enough information to tell. He'll invest in the stock market
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