The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors

Question:

The common stock of Leaning Tower of Pita Inc., a restaurant chain, will generate payoffs to investors next year, which depend on the state of the economy, as follows:

a. The company goes out of business if a recession hits. Calculate the expected rate of return and standard deviation of return to Leaning Tower of Pita shareholders. Assume for simplicity that the three possible states of the economy are equally likely. The stock is selling today for $80.
b. Who would view the stock of Leaning Tower of Pita as a risk-reducing investment-the owner of a gambling casino or a successful bankruptcy lawyer? Explain.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...