Consider a security with stock prices:
60 with probability one eighth i.e 1/8
70 with probability two eights i.e. 2/8
S(1) =
80 with probability three eights i.e. 3/8
100 with probability two eights i.e. 2/8
T = 0 is current period
T = 1 after 1 year
E(S(1)) should be expected value of the stock after 1 year.
Return = [E((S1)) - S(0)] / S(0)
The question is:
Compute the current price S(0) of the stock for which the standard deviation of return would be 15%.