Problem:
The Adelphi Corporation's stock is trading at $50 per share. You own one share and are concerned about the stock price's volatility in the future. You feel there is a 50% chance in one year the stock will be $55 per share, or a 50% chance that the stock will be trading at $40 per share.
Required:
Question 1: Construct the estimated return of the stock in one year, given the above return potential.
Question 2: You can purchase a call option for $5 with a strike price of $50 that expires in a year. What price must the stock reach for you to generate a profit? Graph the net profit of this purchase.
Note: Explain all steps comprehensively.