Suppose that the price of a share of a particular stock listed on the New York Stock Exchange is currently $38. The following probability distribution shows how the price per share is expected to change over a three-month period. Stock Price Change ($) Probability
−2 0.05
−1 0.10
0 0.27
+1 0.20
+2 0.18
+3 0.10
+4 0.10
(a) Construct a spreadsheet simulation model that computes the value of the stock price in 3 months, 6 months, 9 months, and 12 months under the assumption that the change in stock price over any three-month period is independent of the change in stock price over any other three-month period. For a current price of $38 per share, what is the average stock price (in $) per share 12 months from now?
(b) Based on the model assumptions, what are the lowest and highest possible prices (in $) for this stock in 12 months?