suppose that the stock prices in the following three scenarios 550932

Suppose that the stock prices in the following three scenarios are

Scenario

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S(0)

S(1)

S(2)

?1

100

110

120

?2

100

105

100

?3

100

90

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))).

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