Question
Your stockbroker has called to tell you about two stocks: Carrington Atlantic (CAL) and Degy, Inc. (DEG). She tells you that CAL is selling for
Your stockbroker has called to tell you about two stocks: Carrington Atlantic (CAL) and Degy, Inc. (DEG). She tells you that CAL is selling for $340.00 per share and that she expects the price in one year to be $395.00. DEG is selling for $1,861.00 per share and she expects the price in one year to be $2,171.00. The expected return on CAL has a standard deviation of 12 percent, while the expected return on DEG has a standard deviation of 35 percent. The market risk premium for the S & P 500 has averaged 6.5 percent. The beta for CAL is 1.29 and the beta for DEG is 1.51. The 10-year Treasury bond rate is currently 1.90%. Neither CAL nor DEG pays a cash dividend.
a) Determine the probability for each stock that you would earn a negative retun.
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