Use the information for the question(s) below.
The current price of KD Industries' stock is $20. In the next year the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The one year risk-free rate is 5% and will remain constant.
-The risk-neutral probability of a down state for KD industries is closest to:
A) 37.5%
B) 62.5%
C) 40.0%
D) 60.0%

Question

Quizplus · Accepted Answer

A) p = 11ea7e5a_6e85_cbfd_9a0a_3744e01d2309_TB1623_11 = 11ea7e5a_6e85_cbfe_9a0a_130c1f9ea5d4_TB1623_11 = .625 or 62.5%
down state prob = ( 1 - p) = (1 - .625) = .375 or 37.5%

Use the Information for the Question(s) Below