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Calculate the expected value of the tra share

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Kevin is investigating the performance of TRA shares. He believes that for a given 2-month period, the probability of the share price increasing by 4% (i.e. × 1.04 ) is 0.65 and the probability of decreasing by 4% (i.e. × 0.96) is 0.35. The current price of one TRA share is $19.

a) Calculate the expected value of the TRA share price after 2 months.

b) Consider the number of times the TRA share price increases in the next 2 years. What distribution should you use to model this? What values should you use for the parameters of the distribution?

c) Calculate the mean and variance of the distribution in part (b).

d) Estimate the probability that the share price will be more than $28 after 2 years. Do NOT use the normal approximation.

Reference no: EM132698004

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