Identifying the risk associated with two-year investment

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Over a five-year period, the quarterly change in the price per share of common stock for a major oil company ranged from 28% to 12%. A financial analyst wants to learn what can be expected for price appreciation of this stock over the next two years. Using the five-year history as a basis, the analyst is willing to assume that the change in price for each quarter is uniformly distributed between 28% and 12%. Use simulation to provide information about the price per share for the stock over the coming two-year period (eight quarters).

a. Use two-digit random numbers from column 2 of Table 12.2 in the book, beginning with 0.52, 0.99, and so on, to simulate the quarterly price change for each of the eight quarters.

b. If the current price per share is $80, what is the simulated price per share at the end of the two-year period?

c. Discuss how risk analysis would be helpful in identifying the risk associated with a two-year investment in this stock.

Reference no: EM132253164

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