Sassafras Oil is staking all its remaining capital on wildcat exploration off th

Question

Sassafras Oil is staking all its remaining capital on wildcat exploration off the cote d'Huile. There is a 10% chance of discovering a field with reserves of 50 million barrels. If it finds oll, it will immediately sell the reserves to Big Oll at a price depending on the state of the economy. Thus the possible payoffs are as follows: Value of Value of Reserves, Reserves 50 Million Barrels $200,000,000 250,000,000 300,000,00e per Barrel Value of Dryholes Boom Normal economy Recession s 4 Is Sassafras Oll a risky Investment for a diversified Investor in the stock market? O Yes O No

Explanation / Answer

As there is only 10% chance so yes it must be a risky investment .As they are stalking all remaining capital on this so this must be risky as the conversion rate is very less.

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