a penny stock is trading on the pink sheet at $1/share. 1 yr from now, the penny stock could either emerge out of the pink sheet, and the stock will be $5/share. The penny stock could also go completely bust, so the value will be $0. suppose the riskfree rate is 10% annually, what is the risk neutral probability that the penny stock will emrge out of the pink sheet?
the correct answer is .22, but i just dont seem to get it....
Could anyone show me how to derive to this answer...
2007-04-23 9:27 pm
回答 (2)
2007-04-23 10:27 pm
✔ 最佳答案
If you do not buy the stock, and you certainly get a riskfree return of $1.1 after 1 year [$1 * (1+10%)].If you buy the penny stock, let p be the risk neutral probability that the penny stock will emerge out of the pink street:
[$0 * (1-p)] + [$5 * p] = $1.1 ----(note)
5p = 1.1
p=0.22
Note:
The equation means that under risk neutral probability of p, the expected return of buying the penny stock is equal to putting the money to get the riskfree return.
2007-04-27 10:19 pm
What is risk neutral probability?
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