Question

A stock's price is expected to vary between $10 and $20 over the next 6 months. It currently costs $12. If each possible value for the stock is equally likely to occur, then what is the theoretical probability that I will make money purchasing this stock?

1) 73%
2) 80%
3) 100%
4) 12%

Answer 1

The theoretical probability of making money on a stock priced at $12, with an expected variation between $10 to $20, is 80%.

Step-by-step explanation:

The question asks about the theoretical probability of making money on a stock that is expected to vary between $10 and $20 over the next 6 months, with the current price being $12 and each value in that range being equally likely. To calculate this, consider the range of prices that would result in a profit: any price above $12. Given the stock can be anywhere between $10 and $20, there are 8 potential profitable outcomes (prices from $13 to $20) and 10 total possible outcomes (prices from $11 to $20 inclusive since $10 would not be a profit but break even). The probability of making money is thus the number of profitable outcomes divided by the total possible outcomes, which is 8/10 or 80%.