Your stockbroker has called to tell you about two stocks: Snap Inc. (SNAP) and GoPro, Inc. (GPRO). She tells you that SNAP is selling for $15.00 per share and that she expects the price in one year to be $30.00. GPRO is selling for $6.00 per share and she expects the price in one year to be $10.00. The expected return on SNAP has a standard deviation of 20 percent, while the expected return on GPRO has a standard deviation of 30 percent. The market risk premium for the S & P 500 has averaged 7.0 percent. The beta for SNAP is 1.19 and the beta for GPRO is 1.13. The 10-year Treasury bond rate is currently 3.00%. SNAP and GPRO do not pay a cash dividend.

Required:

a)Determine the probability for each stock that you would earn a negative return.

b)Determine the probability for each stock that you would earn more than your required rate of return.

c) Explain why you would or would not buy either or both of the two stocks.

Answer rating: 100% (QA)

a To calculate the probability of earning a negative return we need to use the normal distribution and find the area under the curve to the left of zero For SNAP Expected return 301515 1 or 100 Standa... View the full answer