Question

Your stockbroker has called to tell you about two stocks: Facebook, Inc. (FB) and Tesla, Inc. (TSLA). She tells you that FB is selling for $190.00 per share and that she expects the price in one year to be $240.00. TSLA is selling for $310.00 per share and she expects the price in one year to be $330.00. The expected return on FB has a standard deviation of 15 percent, while the expected return on TSLA has a standard deviation of 35 percent. The market risk premium for the S & P 500 has averaged 6.5 percent. The beta for FB is 1.28 and the beta for TSLA is .32. The 10-year Treasury bond rate is currently 1.80%. Neither FB nor TSLA pays a cash dividend. Required: a) Determine the probability for each stock that you would earn a positive return. b) Determine the probability for each stock that you would earn less than your required rate of return. c) Explain why you would or would not buy either or both of the two stocks

Answer 1

c) I would buy both of the stocks because:

1. Their giving positive return is greater than 50%.

2. Both the returns as predicted by fund managers, are greater than the expected return:

For FB stock: 26.3%> 10.12%

For TSLA Stock: 6.24%> 3.88%