Example 1: Consider one day investment in Endesa stock. Suppose you buy a stock in day t-1 for 24.27 and sell the stock in the next day for 24.30 . Further assume that Endesa does not pay any dividend between days t-1 and t.

a) Calculate the one day simple and continuously compounded return.

b) Suppose that the price of Endesa stock in day t-2 was 24.23 and that no dividend was paid between days t-2 and t-1. Calculate the two day simple and continuously compounded return.

c) Calculate the annualized return.

Example 2: Suppose that the current price of ABC is 100 .

a) What is the expected stock price in six months time if we assume u = 12% per annum, and volatility= 40% per annum?

b) What is the probability that the stock price in six months time is less than 100 ?

Example 3: Estimating parameters u and volatility from data

The mean daily log return for Coca-Cola stock in 2016 was -0.00018 with daily standard deviation of 0.008981.

Estimate parameters u and volatily assuming that year has 252 days.