Question

Over a five-year period, the quarterly change in the price per share of common stock for a major oil company ranged from -7% to 14%. 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 -7% and 14%. Use simulation to provide information about the price per share for the stock over the coming two-year period (eight quarters).

1. Use the random numbers 0.50, 0.95, 0.11, 0.15, 0.56, 0.75, 0.39 and 0.52 to simulate the quarterly price change for each of the eight quarters. If required, round your answers to two decimal places. For those boxes in which you must enter subtractive or negative numbers use a minus sign. (Example: -300)
   

   Quarter	r	Return %
   1	0.50	%
   2	0.95	%
   3	0.11	%
   4	0.15	%
   5	0.56	%
   6	0.75	%
   7	0.39	%
   8	0.52	%

2. If the current price per share is $80, what is the simulated price per share at the end of the two-year period? If required, round your answer to two decimal places.
   
   $   
   
3. Discuss how risk analysis would be helpful in identifying the risk associated with a two-year investment in this stock.
   
   Risk analysis requires   of the eight-quarter, two-year period, which would then provide a distribution of the ending price per share.

Answer 1

(a) Use the random numbers 0.50, 0.95, 0.11, 0.15, 0.56, 0.75, 0.39 and 0.52 to simulate the quarterly price change for each of the eight quarters. If required, round your answers to two decimal places. For those boxes in which you must enter subtractive or negative numbers use a minus sign. (Example: -300)

We are given the price per share of common stock for a major oil company ranged from -7% to 14%

The simulation for quarterly price change is as follows:

Quarter	r	Return %
1	0.5	3.5
2	0.95	12.95
3	0.11	-4.69
4	0.15	-3.85
5	0.56	4.76
6	0.75	8.75
7	0.39	1.19
8	0.52	3.92

The formulas used are as follows:

(b) If the current price per share is $80, what is the simulated price per share at the end of the two-year period? If required, round your answer to two decimal places.

The current price per share is $80.

The simulated price per share at the end of the two-year period is $99.20.

The table obtained is as follows:

Quarter	r	Return %	Price
1	0.5	3.5	$80.00
2	0.95	12.95	$90.36
3	0.11	-4.69	$86.12
4	0.15	-3.85	$82.81
5	0.56	4.76	$86.75
6	0.75	8.75	$94.34
7	0.39	1.19	$95.46
8	0.52	3.92	$99.20

The formulas used are as follows:

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

Risk analysis requires multiple simulations eight-quarter, a two-year period, which would then provide a distribution of the ending price per share.