Question

UU UL WUS 270 2. You are interested in buying a stock that has a price of $40. You have projected the following probabilities: Probability Stock Price (in time 1) Answer the following (showing all work) (a) what is the expected return on the stock if you buy today and sell next year? (b) what is the expected standard deviation of the stock?

Answer 1

Expected price = probablity1 × stock price + ............+ probability(n) × stock price(n)

= 0.1 × 80 + 0.2 × 65 + 0.35 × 42 + 0.20 × 32 + 0.10 × 25 + 0.05 × 8

= 8 + 13 + 14.7 + 6.4 + 2.5 + 0.4

= 45

Expected Return = expected price - initial price / initial price

= 45 - 40 / 40

= 5 / 40

= 10.25%

b)

& SOLUTION X=(ProbabxP) x- 8 0.5 13 th dot 5.5 Probablity Price 0.1 80 0.2 65 0.35 0.2 32 25 0.058 7 (x-7) 2 0.25 30.25- 51.84 42 14.7. 7.2 6.4 -1, 1,2) 2.5 - 5 t 0.4 x 27.1 45 45 - 7.5 25 50,41 {(x- x² = 158.96 15.25 X n = Elx - ²² 158.96 > [158.96 » J31.792 6-1 >> 5.64%