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
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.
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