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17. A stock price is $20. It has an expected return of 12% and a volatility of 25%. What is the stock price that has a 2.5% chance of being exceeded in one day? (For this question assume that there are 365 days in the year.)

A.$20.41

B.$20.51

C.$20.61

D.$20.71

A.$20.41

B.$20.51

C.$20.61

D.$20.71

Answer: B

From the previous question the standard deviation of the change in one day is $0.26. There is a 2.5% chance that the stock price will increase by more than 1.96 standard deviations. The answer is therefore 20+1.96×0.26 = $20.51. The expected return in one day is small and can be ignored.

From the previous question the standard deviation of the change in one day is $0.26. There is a 2.5% chance that the stock price will increase by more than 1.96 standard deviations. The answer is therefore 20+1.96×0.26 = $20.51. The expected return in one day is small and can be ignored.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015