Question

TD Ameritrade found out you were taking SRA 365 this semester and would like to capitalize on your high quality services! Ameritrade believes that variations in stock prices can help to determine whether or not the company is being pumped and dumped. You have been tasked with developing models that would flag suspicious trading patterns. This is a difficult task because stock prices fluctuate frequently throughout the day.

After evaluating the patterns in the stock prices of three companies you determine that their means and standard deviations (SD) are as follows:

Company Means and Standard Deviation

Mean SD Firm A 1.05 0.85 Firm B 1.45 0.81

Calculate the z-score to determine the probability that the stock price for Firm A will fall below a penny (i.e., $0.01). NOTE: Please round your final answer to 2 decimal places.

Answer 1

Given Mean for Firm A = 1.05

Standard deviation SD for firm A = 0.85

We need to find the z-score to determine probability that the stock price for Firm A will fall below a penny $0.01

We need to find the z-score for P(X<0.01)

z-scoe = (X - Mean) / SD

= (0.01 - 1.05) / 0.85

= -1.04 / 0.85

= -1.223529

= -1.22 rounded to 2 decimal places

z-score = -1.22

So the z-score to determine probability that the stock price for Firm A will fall below a penny $0.01 = -1.22

we can alos find the P(X<0.01) by finding the area to the left of z-score -1.22

The area to the left of z-score -1.22 is 0.11123 from the below attached z-table

So P(X<0.01) = 0.11123