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: a) Determine the probability for each stock that you would earn a positive return. b) Determine the probability for each stock that you would earn less than your required rate of return. c) Explain why you would or would not buy either or both of the two stocks.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started