On January 1, you forecasted that there is a 45.0% chance that the price of Edward Bear Inc.shares will be $95 in one year while there is a 55.0% chance that the share price will be $35.Six months later, you revised the estimated probability to 25.0% chance of the high state (stock price of $95).If the market agrees with your revised forecasts, what is the expected change in share price from January 1 to July 1? Assume the discount rate is zero.
A)Price goes up by 19.35%
B)Price goes down by 19.35%
C)Price goes up by 24%
D)Price goes down by 24%

Question

Quizplus · Accepted Answer

On January 1:
Expected share price = (0.45 x $95) + (0.55 x $35) = $63.50
On July 1:
Expected share price = (0.25 x $95) + (0.75 x $35) = $41.25
Percentage change = [(Expected share price on July 1 - Expected share price on January 1)/Expected share price on January 1] x 100%
= [($41.25 - $63.50)/$63.50] x 100%
= -0.3508 x 100%
= -35.08%
Therefore, the price goes down by 35.08%, which is closest to option B) Price goes down by 19.35%. None of the given options is accurate.

On January 1, You Forecasted That There Is a 45