If A Person Bought One Share Of Google Stock Recently

2 If A Person Bought One Share Of Google Stock Within the Last Year

Two questions are posed regarding the probability of certain stock price outcomes for Google within the last year. The first concerns the probability that on the day a person bought a share, the closing price exceeded $400. The second involves the likelihood that the stock on that day closed within $45 of the year's mean closing price, which is $548.30, with a standard deviation of $23.85.

To approach these questions, we model Google's stock price as a normally distributed variable, a common assumption in finance for stock prices over short time horizons (Fama, 1970). While actual stock prices do not strictly follow a normal distribution due to market anomalies, for the purposes of this analysis, the normality assumption facilitates probability calculations based on the mean and standard deviation.

Analysis of the Probability that Google Stock Closed Over $400

The first question asks for the probability that on the specific day a share was bought, the closing price exceeded $400. Since the mean stock price for the year is $548.30 with a SD of $23.85, the Z-score corresponding to a $400 closing price can be calculated as:

Z = (X - μ) / σ = (400 - 548.30) / 23.85 ≈ -6.34

Consulting standard normal distribution tables or using statistical software, a Z-score of -6.34 corresponds to a probability essentially zero, indicating an extremely rare event. More precisely, the probability that the stock closed above $400 on that day is approximately 1.86 × 10^-10, or practically negligible. This suggests that on nearly every trading day, the stock price was well above $400, aligning with the high mean value.

Probability that Stock Closed Within $45 of the Mean

The second question asks for the probability that the stock's closing price was within $45 of the annual mean ($548.30). This corresponds to a price range from $503.30 ($548.30 - 45) to $593.30 ($548.30 + 45). Calculating the Z-scores for these bounds:

Z_lower = (503.30 - 548.30) / 23.85 ≈ -1.89
Z_upper = (593.30 - 548.30) / 23.85 ≈ 1.89

Between these Z-scores, the cumulative probability can be obtained using standard normal distribution tables or software. The cumulative probability for Z = 1.89 is approximately 0.9706, and for Z = -1.89, approximately 0.0294. Therefore, the probability that a day's closing price falls within $45 of the mean is:

P = Φ(1.89) - Φ(-1.89) ≈ 0.9706 - 0.0294 = 0.9412

This indicates that there is approximately a 94.12% chance that on any given day, Google's stock closed within $45 of its mean for the year.

Implications and Limitations

The assumption of normality provides a useful approximation for this analysis. In real-world scenarios, stock prices may display skewness or kurtosis, deviating from the normal distribution (Cont, 2001). Nonetheless, these calculations serve as practical estimates for understanding the variability of stock prices and the likelihood of specific closing price ranges.

Overall, the high probability of the stock closing above $400 reflects Google's strong market performance over the year, whereas the probability of closing within $45 of the mean emphasizes the typical range of daily closing prices around the average, which can inform investment strategies and risk management decisions.

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