Tutorial 8 Questions and Solutions

1 BFF2701 Equity Markets Tutorial 8 Questions Question 1 (Teall (2018) Q6.2) Suggested solution: Question 2 (Teall (2018) Q6.3) The following table represents outcome numbers, probabilities, and associated returns for Stock A:

2 a) What is the probability associated with outcome 9? b) What is the standard deviation of returns associated with Stock A? Suggested solution: Question 3 (Teall (2018) Q6.4) Suggested solution:

3 Question 4 (Teall (2018) Q6.5) What would each of the probabilities in Question 3 be if Nettles Company management were certain enough of its forecast to associate a 5% standard deviation with its return projection? Suggested solution: Reduce the standard deviations in the z scores in question 3 to 0.05 Question 5 (Teall (2018) Q6.6) The following table presents sample daily historical price data for a stock whose returns are given in the third column. Time Price t Return t 0 30 N.A. 1 30.125 0.004167 2 30.25 0.004149 3 30.125 -0.00413 4 32 0.062241 5 34 0.0625 6 31 -0.08824 7 32 0.032258 8 30.5 -0.04688 9 30.75 0.008197 10 30.875 0.004065 11 31 0.004049 12 30.875 -0.00403 13 31 0.004049 14 31.125 0.004032 15 30.25 -0.02811 Time Price t Return t 16 33 0.090909 17 30 -0.09091 18 35.125 0.170833 19 33 -0.0605 20 32.125 -0.02652 21 32.25 0.003891 22 32.375 0.003876 23 32.125 -0.00772 24 32.25 0.003891 25 34.25 0.062016 26 36.375 0.062044 27 38.5 0.058419 28 34.375 -0.10714 29 33.875 -0.01455 30 33.625 -0.00738 a. Based on a traditional sample estimator, calculate a daily variance estimator for this stock. b. What would be the Parkinson extreme value estimated daily returns variance for this stock? Suggested solution: