1. A day trader buys an option on a stock that will return $150 profit if the st
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Question
1. A day trader buys an option on a stock that will return $150 profit if the stock goes up today and lose $650 if it goes down. If the trader thinks there is a 80% chance that the stock will go up, find the standard deviation of the day trader's option value.
The standard deviation of the day trader's option is $_____
2. Suppose that the probabilities of a customer purchasing 0, 1, or 2 books at a book store are 0.1, 0.4, and 0.5, respectively. What is the standard deviation of this customer's book purchases?
The standard deviation of the customer's book purchases is _____
Explanation / Answer
1) Mean = 150*0.80-650*0.20 = -$10
Variance = 150*150*0.80+650*650*0.20-10*10 = 102400
Standard deviation = SQRT(102400) = $320
2) Mean = 0*0.1+1*0.4+2*0.5 = 1.4
Variance = 0*0*0.1+1*1*0.4+2*2*0.5-1.4*1.4 =0.44
Standard deviation = 0.6633
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