Question
Your stockbroker has called to tell you about two stocks: Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX). She tells you that AMZN is selling for
Your stockbroker has called to tell you about two stocks: Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX). She tells you that AMZN is selling for $3,175.00 per share and that she expects the price in one year to be $3,800.00. NFLX is selling for $515.00 per share and she expects the price in one year to be $550.00. The expected return on AMZN has a standard deviation of 30 percent, while the expected return on NFLX has a standard deviation of 20 percent. The market risk premium for the S & P 500 has averaged 6.5 percent. The beta for AMZN is 1.20 and the beta for NFLX is .93. The 10-year Treasury bond rate is currently 1.00%. Neither AMZN nor NFLX pays a cash dividend. Required: b) Determine the probability for each stock that you would earn less than your required rate of return.
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