Skip to content

ACCA Strategic Professional · Advanced Financial Management · Application of option pricing theory in investment decisions

A listed comparator's share price at successive year-ends was 100, 110 and 99, with no dividends. Using continuously compounded annual returns and the sample standard deviation (n-1), what is the estimated annual volatility?

Annual volatility is 14.19%. The two log returns are 9.53% and -10.54%, with a sample variance of 0.0201 using n-1. The square root gives 14.19%. Using the population divisor gives 10.03%, and quoting the variance gives 2.01%.

  1. A14.19%Correct
  2. B10.03%
  3. C20.07%
  4. D2.01%

Explanation

Returns are ln(110/100)=0.09531 and ln(99/110)=-0.10536. The mean is -0.005025 and each deviation is ±0.100335. The sum of squares is 0.020135. Dividing by n-1=1 gives variance 0.020135 and standard deviation 14.19%. Dividing by n=2 gives 10.03%. The range is 20.07%. The variance is 2.01%.

Did you get it right without looking?

One question tells you little. A timed set on Application of option pricing theory in investment decisions shows your real accuracy, how long you take and where you lose marks.

Practise Application of option pricing theory in investment decisionsFree diagnostic mock

More Application of option pricing theory in investment decisions questions