21-19. Harbin Manufacturing has 10 million shares outstanding with a current share price of $23.58 per share. In one year, the share price is equally…

21-19.   Harbin Manufacturing has 10 million shares outstanding with a current share price of $23.58 per share. In one year, the share price is equally likely to be $28 or $20. The risk-free interest rate is 5%.

a.    What is the expected return on Harbin stock?

b.    What is the risk-neutral probability that Harbin’s stock price will increase?

a.    E[r] = 0.5(28 + 20)/23.58 – 1 = 1.78%

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