You are interested in buying a stock that has a price of $72. You have projected

Question

You are interested in buying a stock that has a price of $72. You have projected that next year there is: a 10% probability the stock will equal $1, a 20% probability the stock will equal $44, a 30% probability the stock will equal $83, a 30% probability the stock will equal $95, and a 10% probability the stock will equal $150. 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?

Explanation / Answer

expected value after one year = 10%*1 + 20%*44 + 30%*83 +30%*95 + 10%*150 = 77.3

a return = 77.3/72-1 = 7.36%

b.

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