STAT244.Lecture.02 3

STAT244.Lecture.02 3 - S t | S = σ 2 t where μ is the...

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Some Basics (Contd) Returns: I R t = Pt - P t - 1 P t - 1 I log returns: r t = log(1 + R t ) = log P t - log P t - 1 r t ( K ) = r t + r t - 1 + ··· + r t - K +1 (easy to use) I Adjusting for dividends: 1 + R t = Pt + Dt P t - 1 Random Walk: Let Z 1 , Z 2 ,... be iid with mean ‘ μ ’, std dev ‘ σ ’; Let S 0 be the starting point. Then S t = S 0 + Z 1 + Z 2 + ··· + Z t , t 1 is a RW. E ( S t | S 0 ) = S 0 + μ t ; Var
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Unformatted text preview: ( S t | S ) = σ 2 t , where μ is the drift and σ is the volatility. Geometric RW: If r 1 , r 2 ,... are iid N ( μ,σ 2 ), P t = P exp[ r t + t t-1 + ··· + r 1 ] is an exponential/geometric RW....
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This note was uploaded on 10/16/2010 for the course STAT 244 taught by Professor Dr.velu during the Summer '10 term at Stanford.

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