I just received an email from a Finance 4335 student who asked the following question pertaining to Problem Set 3 (due Thursday, September 19):
Q: On question 1 in problem set #3 it states that there is a 25% probability of losing $100. Does that imply that there is a 75% probability of winning $100?
Here’s my answer:
A: In this problem there are only two possible outcomes – in the loss state, the net worths of Messrs. Moe, Larry and Curley declines from $120 to $20 with probability .25. In the no loss state, their net worths remain intact at $120 with probability .75.