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Your stockbroker has called has called to tell you about two stocks: Netflix, Inc. (NFLX) and International Business Machines Corp. (IBM). He tells...


Your stockbroker has called has called to tell you about two stocks: Netflix, Inc. (NFLX) and International Business Machines Corp. (IBM). He tells you that Netflix is selling for $138.00 per share and that he expects the price in one year to be $160.00. IBM is selling for $167.00 per share and he expects the price in one year to be $170.00. The expected return on NFLX has a standard deviation of 30 percent, while the expected return on IBM has a standard deviation of 8%. The market risk premium for the S & P 500 has averaged 7.5 percent. The beta for NFLX is .7 and the beta for IBM is .9.

Required:

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

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

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

 


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Oct 15, 2019

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