Question: Buying stock (5.3, 6.1) You purchase a hot stock for $1000. The stock either gains 30% or loses 25% each day, each with probability 0.5. Its returns on consecutive days are independent of each other. You plan to sell the stock after two days.
(a) What are the possible values of the stock after two days, and what is the probability for each value? What is the probability that the stock is worth more after two days than the $1000 you paid for it?
(b) What is the mean value of the stock after two days? (Comment: You see that these two criteria give different answers to the question "Should I invest?")