Question

Rey is considering buying shares of TWA stock. The stock currently sells for $50 per share. The stock changes in value at 9:00 am each day, either increasing in value by $11 or decreasing in value by $13. The stock will increase in value with 40% probability, and decrease in value with 60% probability. The stock follows a random walk. In two days, what is the probability that the TWA stock is greater than $30

Answer 1

Answer: 64%

Explanation:

Given the following :

Current price of stock = $50

Probability of increase per day = 40% = 0.4

Probability of decrease = 60% = 0.6

Value of increase = $11

Value of decrease = $13

Probability that stock is greater than $30 in two days :

For stock to be greater than $30 in two days ;

It either increases in both days or increases in a day and falls the other

Hence, probability that stock is greater than $30

P(increase and increase) OR P(increase and decrease) OR P(decrease and increase)

(0.4 × 0.4) + (0.4 × 0.6) + (0.6 × 0.4)

0.16 + 0.24 + 0.24 = 0.64

0.64 × 100 = 64%