Q1) Let the monthly stock in the pharmaceutical manufacturer in decades after WW2. Average monthly return was 1.4%, with standard deviation of 6.0%.
Without additional information about returns, what suppositions do you wish to make to be able to play “what if” games, like those in the b., c. and d. below? Can you prepare some reservations about suppositions?
a) Making suppositions of a., what fraction of months did stock drop 10% or more? Re-express your result in intuitive form like “one in 10 months”.
b) What fraction of months did same stock increase by at least 10%? How does this frequency compare with frequency of dropping by at least 10%? Is this due to mean or due to the sd of returns?
c) What is the chance that stock will fall by more than 15% next month? What extra assumption are you making when replying this question?