The following numbers were randomly generated from a standard normal distribution:-0.25    0.3     1.5     -1.2     -1.65     1.5Suppose a security follows a geometric Brownian motion with volatility parameter, sigma=0.2, and drift parameter mu=-0.01.  If the initial closing price is S0=s=50, compute six more simulated daily closing prices.

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Asked Jul 22, 2019
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The following numbers were randomly generated from a standard normal distribution:

-0.25    0.3     1.5     -1.2     -1.65     1.5

Suppose a security follows a geometric Brownian motion with volatility parameter, sigma=0.2, and drift parameter mu=-0.01.  If the initial closing price is S0=s=50, compute six more simulated daily closing prices. 

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Step 1

The formula for simulated price,

S based on the initial closing price of S0 will be given by the equation on the white board. The meanings of the symbol are shown below:

µ = drift parameter = - 0.01

σ = volatility parameter = 0.2,

t = time period = 1 day = 1/365

ε = randomly generated number from a standard normal distribution

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[(4)xt+o£] S S xe 2

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Step 2

So, the formula for simulation will take the shape shown on the white boa...

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0.22 1 [(-0.01- +0.2xs] 2 365 S 50xe

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