Question: Consider a stock whose current stock price is $500 and its volatility is 35%. The risk-free interest rate is 5% per annum. The future stock

Consider a stock whose current stock price is $500 and its volatility is 35%. The risk-free interest rate is 5% per annum. The future stock price is log-normally distributed. Risk-averse investors require the stock return to be 10% per annum.

(a) What is the risk-neutral probability that stock price in year 2 is higher than $600?

(b) What is the real probability that stock price in year 2 is higher than $600?

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