1. A stock price is currently 50. Its expected return and volatility are 12% and 30%, respectively. What is the probability that the stock price will be greater than 80 in 2 years? (Hint: ST > 80 when ln ST > ln 80.)
2. Stock A, whose price is $30, has an expected return of 11% and a volatility of 25%. Stock B, whose price is $40, has an expected return of 15% and a volatility of 30%. The processes driving the returns are correlated with correlation parameter ρ. In Excel, simulate the two stock price paths over 3 months using daily time steps and random samples from normal distributions. Chart the results and by hitting F9 observe how the paths change as the random samples change. Consider values for ρ equal to 0.25, 0.75, and 0.95.