Question

Your stockbroker has called to tell you about two stocks: Snap Inc. (SNP) and Twitter, Inc. (TWTR). She tells you that SNP is selling for $20.00 per share and that she expects the price in one year to be $40.00. TWTR is selling for $32.00 per share and she expects the price in one year to be $38.00. The expected return on SNP has a standard deviation of 25 percent, while the expected return on TWTR has a standard deviation of 15 percent.   The market risk premium for the S&P 500 has averaged 6.0 percent. The beta for SNP is 1.76 and the beta for TWTR is .78. The 10-year Treasury bond rate is currently 1.00%. Neither SNP nor TWTR pays a cash dividend.

Required:

1. Determine the probability for each stock that you would earn a negative return.
2. Determine the probability for each stock that you would earn more than your required rate of return.
3. Explain why you would or would not buy either or both of the two stocks.

Answer 1

(a).

Ascertain the probability for individual stock that you would receive a negative return:

  As comprehend that repayments on a stock support a normal delivery.

Allow us pretend that the Mean return on both of the stocks supports the CAPM design of return.

ER on SNP (ESNP = Rt + BSNP( Rm - Rt)

Rt = Return on Risk-Free Treasury bonds,

BSNP= Beta of SNP Stock, Rm = Return of Market portfolio.

= 1+1.76 (6-1)

= 9.8 %,

Furthermore Exacted return on TWTR= 1+0.78 (6-1) = 4.9%

since the repayments on both the assets will develop Common administration, the probability of them closing up with negative returns can be estimated by multiplying the Z value under 0.

Where X = expected rate and = average return , = standard deviation

=(0-0.098)/0.25

=-0.392

For Z value of -0.392, for Z- table for negative values = 0.34753, Probability of negative returns for SNP= 0.34753.

SO, Z for TWTR = (0-0.049)/0.15 = -0.32667.

Z value = 0.37196 ,

Probability of getting negative returns for TWTR =0.37196.

We can recognize that TWTR is becoming a larger possibility of noticing a negative results, that is because its regular variation is weak, indicating more further volatilization in the assets.

(b).

Define the probability for each stock that you would gain more than your essential ROR:

Accurately like we estimated the possibility of making a return from 0 to exacted return,

Probability of a stock gaining more than exacted return can be determined by naturally accounting (1- the probability of getting 0 to the exacted return.).

(c).

Describe why you would or would not buy either or both of the two stocks:

Required return on TWTR= (38-32)/32 = 18.75%

Required return on SNP = (40-20)/20 = 100%.

Both the stocks are required to return essential than the CAPM exacted returns, I would invest in the stocks.