Question
Martin is considering buying shares in Doyle Technologies. These shares are not expected to pay any dividends for the foreseeable future. The current market price
Martin is considering buying shares in Doyle Technologies. These shares are not expected to pay any dividends for the foreseeable future. The current market price for Doyle shares is $100. Because this company is researching various experimental technologies, it is very hard to predict the exact future performance of its shares. Martin has some experience with the technologies being researched. He estimates that in any given year, there is a 20% chance the company will come out with a new technology, pushing the share price up by $35. However, in the event that the company does not discover any new technologies (with a probability of 80%), the market will lose confidence in Doyle Technologies, and the share price will fall by $6. a) For each of the two cases (whether they make a discovery or not), determine the return on a one-year investment in Doyle Technologies shares. (1 mark) b) Using your response to part a), determine the expected return on a one-year investment in Doyle Technologies shares. (1 mark) c) Calculate the standard deviation of the one-year return. (1 mark) (Question 42 continues on the next page) 17 Suppose Martin buys a share in Doyle Technologies, and decides he will hold it for two years. d) Assuming that Martins assumptions about the share price movements and probabilities are correct, list out the three possible prices for the share in two years time. (2 marks)
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