The current price of a non-dividend-paying stock is $30. Over the next six months it isexpected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability p of that the stock price will be $26?O 0.4O 0.6O 0.7O None of theseO 0.5◄ PreviousNext ▸

Data given: S0=$30 u=$36/$30 = 1.2 d=$26 /$30=0.866667 R=Risk free rate=0% Required: Risk neutral…

Answered: The current price of a…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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(Expected return and standard deviation) What is the expected return and standard devia- tion of the return for the next year on a stock that is selling for $30 now and has probabil- ities of 0.2, 0.6, and 0.2 of selling one year from now at $24, $33, and $39, respectively? Assume that no dividends will be paid on the stock during the next year and ignore taxes?
Stock R has a beta of 2.5, Stock S has a beta of 0.65, the required return on an average stock is 14%, and the risk-free rate of return is 6%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places. %
A. If a stock costs $55 one month and drops to $45 the next month, what is the expected stock price the next month, if we assume the stock follows a random walk? B. Explain both technical and fundamental analysis and what form of the efficient market hypothesis corresponds to each.
Consider a stock with a current price of P = $27.Suppose that over the next 6 months the stockprice will either go up by a factor of 1.41 or downby a factor of 0.71. Consider a call option on thestock with a strike price of $25 that expires in6 months. The risk-free rate is 6%.(1) Using the binomial model, what are the endingvalues of the stock price? What are the payoffsof the call option?
Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) a. 8.76% b. 8.98% c. 9.21% d. 9.44% e. 9.68%
A share of stock with a beta of 0.8 currently sells for $50. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 1%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what much be investors' expectation of the price of the stock at the end of the year? $_ Hint: [CAPM] Expected Return (R) = Rf + Beta *Market Risk Premium; Expected Return (R) = Dividend Yield + Capital Gains Yield, where dividend yield=D1/PO and capital gains yield = (P1-Po)/PO
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 8% 9 7 Factor Inflation Industrial production Oil prices Factor Beta 1.1 0.6 0.3 a. If T-bills currently offer a 7% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. (Do not round intermediate calculations. Round your answer to 1 decimal place.) X Answer is complete but not entirely correct. Expected rate of return 19.0 X %
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A stock has a required return of 16%, the risk-free rate is 5.5%, and the market risk premium is 4%. a) What is the stock's beta? b) If the market risk premium increased to 8%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. Do not round intermediate calculations. Round your answer to two decimal places.
2. Based on the following information calculate the expected return and standard deviation for the two stocks: State of economy Probability of state of economy Rate of return if state occur Stock A Stock B -.17 .12 .29 Recession Normal Boom 3. How should the price of a stock change when it goes ex-dividend? 4. Suppose stock in Gamma Air Freight has a beta of 1.25. the market risk premium is 7% and the risk free rate is 6%. Alpha's last dividend was $2 per share and the dividend is expected to grow at 8% indefinitely. The stock currently sells for $30. What is Gamma's cost of equity capital? .05 .65 .30 .05 .08 .13
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The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk- neutral probability p of that the stock price will be $26? O 0.4 O 0.6 O 0.7 None of these O 0.5