Explore BrainMass

Explore BrainMass

    Stock Price Estimate

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Please look at the attached file.

    Consider a security with stock prices:
    60 with probability one eighth i.e 1/8
    70 with probability two eights i.e. 2/8
    S(1) =
    80 with probability three eights i.e. 3/8
    100 with probability two eights i.e. 2/8

    T = 0 is current period
    T = 1 after 1 year
    E(S(1)) should be expected value of the stock after 1 year.
    Return = [E((S1)) - S(0)] / S(0)
    The question is:
    Compute the current price S(0) of the stock for which the standard deviation of return would be 15%.

    © BrainMass Inc. brainmass.com June 4, 2020, 1:57 am ad1c9bdddf
    https://brainmass.com/business/business-math/stock-price-estimate-429845

    Solution Preview

    We have

    E(S(1)) = 1/8(60) + 2/8(70) + 3/8(80) + 2/8(100)
    = 1/8(60 + 2*70 + 3*80 + 2*100)
    = 1/8(640)
    = 80.

    We also have

    E(S(1)^2) = 1/8(60^2) + ...

    Solution Summary

    We estimate the future price of a stock as well as the uncertainty of this estimate based on its expected future performance.

    $2.19

    ADVERTISEMENT