In: Finance
You have the following stock price information of firm XYZ. (4pts)
Period (t) |
XYZ Stock Price per share ($) |
0 |
2.50 |
1 |
2.70 |
2 |
2.66 |
3 |
2.43 |
4 |
2.57 |
5 |
2.55 |
6 |
2.56 |
7 |
2.63 |
8 |
2.85 |
9 |
2.94 |
10 |
2.99 |
a) Calculate the standard deviation for the XYZ stock returns if t=0 indicates the XYZ’s initial public offering (IPO).
b) Calculate the standard deviation for the XYZ stock returns if the given periods (from t=0 to t=10) are some extracted periods from the population (i.e., random sampling).
First we need to find the returns from the share price, this can be found as:
Return of day t+1 = ( Price t+1 - Price t ) / Price t
Period | Stock price | Returns |
0 | 2.5 | |
1 | 2.7 | 0.08 |
2 | 2.66 | -0.01481 |
3 | 2.43 | -0.08647 |
4 | 2.57 | 0.057613 |
5 | 2.55 | -0.00778 |
6 | 2.56 | 0.003922 |
7 | 2.63 | 0.027344 |
8 | 2.85 | 0.08365 |
9 | 2.94 | 0.031579 |
10 | 2.99 | 0.017007 |
Question a)
Standard deviation of returns, considering the given data as the population (all data points are given, because the first entry is considered the IPO price) :
Formula:
SD =
Finding the average:
= Sum of returns / 10
= 0.019205
SD = Sqrt ( (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 + (0.08 - 0.019205)^2 / 10)
Solving in excel:
Period | Stock price | Returns | Return - mean | (Return - mean)^2 | |
0 | 2.5 | ||||
1 | 2.7 | 0.08 | 0.060794865 | 0.003696016 | |
2 | 2.66 | -0.01481 | -0.034019949 | 0.001157357 | |
3 | 2.43 | -0.08647 | -0.1056713 | 0.011166424 | |
4 | 2.57 | 0.057613 | 0.038408034 | 0.001475177 | |
5 | 2.55 | -0.00778 | -0.026987236 | 0.000728311 | |
6 | 2.56 | 0.003922 | -0.015283566 | 0.000233587 | |
7 | 2.63 | 0.027344 | 0.008138615 | 6.62371E-05 | |
8 | 2.85 | 0.08365 | 0.064445055 | 0.004153165 | |
9 | 2.94 | 0.031579 | 0.012373813 | 0.000153111 | |
10 | 2.99 | 0.017007 | -0.002198332 | 4.83266E-06 | |
Average | 0.019205 | 0.022834218 | Sum | ||
SD^2 | 0.002283 |
SD^2 is calculated by The sum value divided by 10. (As the formula given)
Thus,
SD = sqrt ( 0.002283) = 0.047785 or 4.78%
Question b)
Instead of considering this data set as the population, if we consider it as a random sample, we need to make a small change to the formula to calculate the SD.
In this case formula:
SD =
The rest of the steps are the same as above, so we will take the value of sum from the above part:
Sum = 0.022834218
We now divide this by 9, instead of 10 and get:
SD^2 = 0.002537
Thus,
SD = sqrt ( 0.002537) = 0.05037 or 5.037%
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