Suppose that the stock prices in the following three scenarios are :

Scenario

1 2 3

S (0) 100 100 100

S (1) 110 105 90

S (2) 120 100 100

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))).