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Suppose the stock price of a firm, S, follows a geometric Brownian motion process dSt = Stdt + StdWt with current price S0 = $100 and mean return =...
Suppose the stock price of a firm, S, follows a geometric Brownian motion processdSt = Stdt + StdWtwith current price S0 = $100 and mean return = 15% p.a.(a) Assuming the stock volatility to be = 20% p.a., simulate three different stockpaths for one year T = 1 with time steps Δt = 1=250 = 0:004. Present yourresults in a graph (Note that the normal deviates for each path will be different.)(b) Assuming three different economic environments for volatility = 5%; 20% or50% p.a., for a given realization of uncertainty, simulate a stock price path foreach economy for one year T = 1 with time steps Δt = 0:004. Present your resultsin a graph (Note that the normal deviates for each path will be the same.)
