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An investor has bought shares worth £5,000 and wants to estimate how much they will be worth in a year’s time. Give both a deterministic and...

An investor has bought shares worth £5,000 and wants to estimate how much they will
be worth in a year’s time. Give both a deterministic and stochastic model based on an
expected growth rate of 7%.

Answers

caroline
Deterministic model
The outcome from a deterministic model would be the prediction that the value in a
year’s time would be:
5000 ¥1.07 = £5350

Stochastic model
A stochastic model would have to allow for randomness in the growth rate. For
example, it might be decided (based on past performance of the company and prospects
for the company, the investment sector and the economy in general) that the
probabilities of different growth rates for the shares are:
20% with probability 0.1
10% with probability 0.6
growth
0% with probability 0.2
10% with probability 0.1
ÏÔÔ
carol1 answered the question on April 23, 2018 at 11:57

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