Monte Carlo analysis of stock price path

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QUESTION

Steps to follow in monte carlo analysis using Excel

1. Pick a stock
2. Get the raw closing stock price for each month/week for the last 2 years
3. Compute a monthly return using the LN (St/St-1)
4. Compute the mean and standard deviations using sample statistics
5. Annualize the parameters
6. Use the last observation for stock price as the initial S in the next step
7. Input these parameters into the equation for the stock price process (equation 14.8 on page 307), and compute S
a. For , use NORMSINV(RAND())
8. Get the starting stock price for the next week, based on the initial stock price and S in the previous week. Do this for 10 weeks (10 trials for sample 1)
9. The closing stock price at the end of 10 weeks is one observation from the first sample
10. We want to repeat this process, and obtain 100 samples of 10 trials each – to get 100 samples with the stock price at week 10
a. Record the week 10 simulated stock price in F39
b. In column E, create the index value for each sample (e.g., 1 through 100 for 100 samples)
c. Highlight E39 to F139
d. Go to Data tab, choose What-if Analysis, Data Table
e. Select a blank cell
f. Click OK
g. You should have the 100 samples populated with the simulated stock price at week 10
11. Compute the mean and standard deviation from the 100 samples
12. Compute the probability of the stock price increasing by X% over the next ten weeks

Sample Solutions
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