A stockbroker has called about two stocks: International Business Machines Corporation (IBM) and Netflix, Inc. (NFLX). She tells you that IBM is selling for $125.00 per share and that she expects the price in one year to be $150.00. Netflix is selling for $340.00 per share and she expects the price in one year to be $385.00. The expected return on IBM has a standard deviation of 15 percent, while the expected return on NFLX has a standard deviation of 30 percent. The market risk premium for the S & P 500 has averaged 6.0 percent. The beta for IBM is 1.61 and the beta for NFLX is 1.53. The ten-year Treasury bond rate is 3 percent.
a) Determine the probability for each stock that you would earn a negative return.
b) Determine the probability for each stock that you would earn more than your required rate of return.
c) Explain why you would or would not buy either or both of the two stocks.