Question - Your stockbroker has called has called to tell you about two stocks: Microsoft Corporation. (MSFT) and Oracle Corporation (ORCL). He tells you that Microsoft is selling for $51.00 per share and that he expects the price in one year to be $58.00. Oracle is selling for $41.00 per share and he expects the price in one year to be $44. The expected return on MSFT has a standard deviation of 12 percent, while the expected return on ORCL has a standard deviation of 18%. The market risk premium for the S & P 500 has averaged 5.5 percent.
Required:
Determine the probability for each stock that you would earn more than your required rate of return.
Determine the probability for each stock that you would earn a return that is negative.
Explain why you would or would not buy either or both of the two stocks.