13. Specific versus Market Risk. Sassafras Oil is staking all its remaining capital on wildcat
exploration off the Côte d'Huile. There is a 10% chance of discovering a field with reserves of
50 million barrels. If it finds oil, it will immediately sell the reserves to Big Oil at a price
depending on the state of the economy. Thus, the possible payoffs are as follows:
Value of Reserves
Value of
Dryholes
per Barrel
Boom
Normal economy
Recession
$4
5
Value of Reserves
(50 Million Barrels)
$200,000,000
250,000,000
300,000,000
6
Is Sassafras Oil a risky investment for a diversified investor in the stock market—compared,
say, with the stock of Leaning Tower of Pita, described in Problem 15? Explain. (L011-4)