Suppose that the price of a share of a particular stock listed on the New York Stock Exchange is currently $39

Finance Dec 09, 2021

Suppose that the price of a share of a particular stock listed on the New York Stock Exchange is currently $39. The following probability distribution shows how the price per share is expected to change over a three-month period:

Stock Price Change ($)	Probability
–2	0.05
–1	0.10
0	0.25
+1	0.20
+2	0.20
+3	0.10
+4	0.10

(a)

Construct a spreadsheet simulation model that computes the value of the stock price in 3 months, 6 months, 9 months, and 12 months under the assumption that the change in stock price over any three-month period is independent of the change in stock price over any other three-month period. For a current price of $39 per share, what is the average stock price per share 12 months from now? What is the standard deviation of the stock price 12 months from now?

Round your answers to two decimal places.

Average	$(_____)
Standard Deviation	$(_____)

(b)

Based on the model assumptions, what are the lowest and highest possible prices for this stock in 12 months?

Minimum	$(_____)
Maximum	$(_____)

Based on your knowledge of the stock market, how valid do you think this is? Propose an alternative to modeling how stock prices evolve over three-month periods.

This model may not be valid since extremely low probability events in real life can result in (large,small) changes in stock prices. To model a wider range of outcome, (a bounded, an unbounded) distribution for the three-month change could be used.