1. Consider a sequential trade model in which a security has an uncertain value. The value V of the security can either be $150 or $250 with equal probability. The proportion of informed traders is 40%, whereas the proportion of liquidity traders is 60%. As usual, liquidity traders buy or sell with equal probability, whereas informed traders only buy when they know the security price is high, and sell when they know the security price is low. The dealer will set his ask at:
a. Ask = 170
b. Ask = 180
c. Ask = 200
d. Ask = 220
e. Ask = 230
f. None of the above.
2. A portfolio comprises 100 shares of Quicksand Mining Co. ($130 per share) and 200 shares of Bad Bet Bond Fund ($32.50 per share). The expected return on Quicks & Mining Co.’s shares is 60% and the expected return on Bad Bet Bond Fund’s shares is 30%, what is the expected return for the portfolio?
A. 50.00%
B. 45.00%
C. 42.50%
D. 40.00%