Re: expected stock price/volatility question

On Nov 8, 4:35 pm, Ray Vickson <C6...@xxxxxxx> wrote:
On Nov 8, 6:56 am, elodie.gill...@xxxxxxxxx wrote:

Dear Forum,

I would need some help answering the following questions.

Suppose that a stock price has an expected return of 16% per annum and
a volatility of 30% per annum.

Assuming that daily stock price changes are independent and
identically distributed (a BIG assumption, that finance scholars argue
about), we then have to worry about whether changes are additive or
multiplicative. Assuming additivity, the expected daily change is 30%/
365 (if there are 365 working days in a working year---otherwise,
change the divisor). If v is the daily variance, the annual variance
is 356*v, so the annual standard deviation is sqrt(365)*sqrt(v), and
this equals 0.30 (30%). So, you can find the daily standard deviation,
sqrt(v) = 30%/sqrt(365).

R.G. Vickson

When the stock price at the end of a
certain day is $50, calculate the following:

a.The expected stock price at the end of the next day.
I guess that I need to convert the 16% annual return into a daily
return. I think that I need to use a square root of time coefficient.
I am confused.

b.The standard deviation of the stock price at the end of the next
day.
That is 30%, right?

No.



c.The 95% confidence limits for the stock price at the end of the next
day.
I can do that when I have an answer for question a.

I greatly appreciate your help.

many thanks. I appreciate your help.

.