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%