The price of a share of a particular stock listed on the New York Stock Exchange

Question

The price of a share of a particular stock listed on the New York Stock Exchange is currently $41. The following probability distribution shows how the price per share is expected to change over a three-month period:

Set up intervals of random numbers that can be used to generate the change in stock price over a three-month period. If required, round your answers to two decimal places.

With the current price of $41 per share and the random numbers 0.3707, 0.0873, 0.2745 and 0.5897, simulate the price per share for the next four 3-month periods.

What is the ending simulated price per share?

$  

Stock Price Change ($) Probability -1 0.15 0 0.10 1 0.05 2 0.10 3 0.25 4 0.25 5 0.10

Explanation / Answer

Developing Random number allocation table

Explanation

See the cummulative probability in first row = 0.15. When writing the interval it includes all random number upto but not including 0.15. Now see the second row had cummulative prob of 0.25. That means here we have random number between 0.15 and below 0.25........same way we write the interval for remaining.

Question - 2 ........... ending price at the end of each 3 months period (quarter)

Explanation

0.3707 is our first random number. Now we have see the table - 1 .....for interval in which this R.N of 0.3707 falls. You can notice that it falls in 0.30 to 0.40 for which the change is + 2.

0.0873 is our next one. It falls in 0.00 - 0.15 ------for which change is - 1

Ending price values are obtained by adding or deducting the change. For example 41 + 2 = 43 .. for 0.3707 RN ( first 3 months ) and for the next 3 months 43 - 1 = 42 ..........for 0.0873 RN

Question - 3

Year ending ( or ) End of 4th quarter ( 3 - months) period price = 46...........final answer

Price Chg Prob Cummulative Interval -1 0.15 0.15 00 but less than 0.15 0 0.1 0.25 0.15 but less than 0.25 1 0.05 0.3 0.25 but less than 0.30 2 0.1 0.4 0.30 but less than 0.40 3 0.25 0.65 0.40 but less than 0.65 4 0.25 0.9 0.65 but less than 0.90 5 0.1 1 0.90 but less than 1.00

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