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Distribution of Stock Prices Consider a stock whose current stock price is $250 and its volatility is 20%. The risk-free interest rate is 3% per

Distribution of Stock Prices

Consider a stock whose current stock price is $250 and its volatility is 20%. The risk-free interest rate is 3% 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 $300?

(b) What is the real probability that stock price in year 2 is higher than $300?

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