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The prices of stocks or other financial instruments are
Chapter 4, Problem 9E(choose chapter or problem)
The prices of stocks or other financial instruments are often modeled with a lognormal distribution. An investor is considering purchasing stock in one of two companies, \(A\) or \(B\). The price of a share of stock today is $1 for both companies. For company \(A\), the value of the stock one year from now is modeled as lognormal with parameters \(\mu=0.05\) and \(\sigma=0.1\). For company \(B\), the value of the stock one year from now is modeled as lognormal with parameters \(\mu=0.02\) and \(\sigma=0.2\).
a. Find the mean of the price of one share of company \(A\) one year from now.
b. Find the probability that the price of one share of company \(A\) one year from now will be greater than $1.20.
c. Find the mean of the price of one share of company \(B\) one year from now.
d. Find the probability that the price of one share of company \(B\) one year from now will be greater than $1.20.
Equation Transcription:
Text Transcription:
A
B
mu = 0.05
sigma = 0.1
mu = 0.02
sigma = 0.2
Questions & Answers
QUESTION:
The prices of stocks or other financial instruments are often modeled with a lognormal distribution. An investor is considering purchasing stock in one of two companies, \(A\) or \(B\). The price of a share of stock today is $1 for both companies. For company \(A\), the value of the stock one year from now is modeled as lognormal with parameters \(\mu=0.05\) and \(\sigma=0.1\). For company \(B\), the value of the stock one year from now is modeled as lognormal with parameters \(\mu=0.02\) and \(\sigma=0.2\).
a. Find the mean of the price of one share of company \(A\) one year from now.
b. Find the probability that the price of one share of company \(A\) one year from now will be greater than $1.20.
c. Find the mean of the price of one share of company \(B\) one year from now.
d. Find the probability that the price of one share of company \(B\) one year from now will be greater than $1.20.
Equation Transcription:
Text Transcription:
A
B
mu = 0.05
sigma = 0.1
mu = 0.02
sigma = 0.2
ANSWER:Solution
Step 1 of 5
Let X is the price of the company A share
Here X follows the lognormal distribution with parameters and
Let Y is the price of the company B share
Here Y follows the lognormal distribution with parameters and