Discuss the performance of the trading strategy

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Reference no: EM131279682

Let us evaluate a simple trading strategy whose goal is to limit downside risk. Suppose you are holding one share of stock. You sell the stock as soon your loss (relative to the original price of stock) exceeds 10% of the original stock value; otherwise you keep the stock. Once you have sold the stock, you do not buy it back for three months.

If you have not sold the stock, you sell it at the end of three months. Pick a stock, and determine its drift and volatility from historical data.

Check also if a mean-reverting process appears to apply. Implement a simulation model in which the price of the stock is assumed to follow

(1) an arithmetic random walk,

(2) a geometric random walk,

(3) mean reversion, and

(4) geometric mean reversion with the parameters you estimated.

Discuss the performance of the trading strategy depending on the process the price of the stock is assumed to follow.

Reference no: EM131279682

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