The current price of a non-dividend-paying stock is $30.Over the next six months it is expected to rise to $36 or fall to $26.Assume the risk-free rate is zero.What is the risk-neutral probability of that the stock price will be $36?
A) 0.6
B) 0.5
C) 0.4
D) 0.3

Question

Quizplus · Accepted Answer

The risk-neutral probability (p) can be calculated using the formula: p = (e^rt - d) / (u - d), where e^rt = 1 (since the risk-free rate, r, is zero and time, t, is six months), u is the up factor (36/30 = 1.2), and d is the down factor (26/30 = 0.8667). Plugging these values in gives p = (1 - 0.8667) / (1.2 - 0.8667) = 0.1333 / 0.3333 = 0.4.

The Current Price of a Non-Dividend-Paying Stock Is $30