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