a stock price has an expected return of 9% and a volatility of 25%

Finance Apr 02, 2021

a stock price has an expected return of 9% and a volatility of 25%. It is currently $40. What is the probability that it will be less than $30 in 18 months?

Expert Solution

Answer:

As per blacksholes formula we compute N (-d2)

d2 =log (40/30) + (9% -0.25^2*0.5)*1.5/(0.25*sqrt (1.5), here 1.5 is time period,0.25 is volatility, 9% is return.

d2 = 1.227

So N (-d2) comes to probability of around 0.11

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