Your stockbroker has called has called you about two stocks: Facebook, Inc. (FB) and Amazon, Inc. (AMZN).
She tells you that Facebook is selling for $178.00 per share and that she expects the price in one year to be $215.00. Amazon is selling for $1,300.00 per share and she expects the price in one year to be $1,375.00.
The expected return on FB has a standard deviation of 10 percent, while the expected return on AMZN has a standard deviation of 20 percent.
The market risk premium for the S & P 500 has averaged 6.5 percent. The beta for FB is .57 and the beta for AMZN is 1.34. The ten-year Treasury bond rate is 3 percent.
Required:
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.