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    Expected Profit

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    You know that there is a 40% probability that Microsoft will be selling for $22.50 three months from now and a 60% probability that it will be selling for $42.50. Microsoft does not pay a dividend. Currently, Microsoft is selling for $30. You are thinking of either buying 100 shares or selling short 100 shares. If you go long, what is your expected outcome per share? What is the most you can make by going short? If you were mildly risk averse, would you choose going long or short?

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    Solution Preview

    If one goes long the expected outcome is Profit = Sales Price-Purchase price
    Here the Purchase price= $30
    and outcome under two scenario:
    A) 40% Probability of Price is $22.5=
    Than the Profit = 22.5-30= ($7.50)

    Expected Profit= Probability * Profit =($3.00)

    B) ...

    Solution Summary

    Expected Profit is encompassed.