Your stockbroker has called to tell you about two stocks: The 3M company (MMM) and Microsoft (MSFT).
Question:
Your stockbroker has called to tell you about two stocks: The 3M company (MMM) and Microsoft (MSFT). She tells you that MMM is selling for $200.00 per share and that she expects the price in one year to be $230.00. MSFT is selling for $124.00 per share and she expects the price in one year to be $160.00. The expected return on MMM has a standard deviation of 20 percent, while the expected return on MSFT has a standard deviation of 15 percent. The market risk premium for the S & P 500 has averaged 6.0 percent. The beta for MMM is 1.05 and the beta for MSFT is 1.25. The 10-year Treasury bond rate is currently 2.00%. Neither MMM nor MSFT 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.