An Introduction to Management Science 13th Edition by David Anderson,Dennis Sweeney ,Thomas Williams ,Jeffrey Camm, Kipp Martin

Exercise 17

Over a five-year period, the quarterly change in the price per share of common stock for a major oil company ranged from -8% and +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 the change in price for each quarter is uniformly distributed between -8% 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, 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.