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Your stockbroker has called to tell you about two stocks: Snap Inc. (SNP) and Twitter, Inc. (TWTR). She tells you that SNP is selling for $20.00 per share and that she expects the price in one year to be $40.00. TWTR is selling for $32.00 per share and she expects the price in one year to be $38.00. The expected return on SNP has a standard deviation of 25 percent, while the expected return on TWTR has a standard deviation of 15 percent. The market risk premium for the S&P 500 has averaged 6.0 percent. The beta for SNP is 1.76 and the beta for TWTR is .78. The 10-year Treasury bond rate is currently 1.00%. Neither SNP nor TWTR pays a cash dividend.
Required:
Question a) Determine the probability for each stock that you would earn a negative return.
Question b) Determine the probability for each stock that you would earn more than your required rate of return.
Question c) Explain why you would or would not buy either or both of the two stocks.
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