While doing your calculations, Ameritrade has asked that you keep their most rec
ID: 2927719 • Letter: W
Question
While doing your calculations, Ameritrade has asked that you keep their most recent policy in mind. Ameritrade has instituted a policy in which firms with prices within ~68% of the normal distribution of scores are ignored, outside ~68% (but within ~95%) of the normal distribution of scores are monitored, and outside ~95% of the normal distribution of scores are restricted. This policy is based on the most recent fraudulent activities that took place at Firm X.
Provide the cutoff values you would use to ignore, monitor, or restrict trade for Firm A based on the recent policy implemented by Ameritrade. Use the numeric values in the following graphic as a guide.
Mean SD
Firm A 1.01 .66
Firm B 1.70 .83
Given your calculations in the previous question, state the decision you would make (i.e., ignore, monitor, or restrict trade) if the stock price for Firm A changed to each of the three values presented below.
a) $1.00
b) $2.10
c) $0.85
Explanation / Answer
For firm A, mean is given as 1.01, and standard deviation is given as 0.66
In a normal distribution we know that :
around 68% of the values lie within 1 standard deviation of the mean.
around 95% of the values lie within 2 standard deviations of the mean.
around 99% of the values lie within 3 standard deviations of the mean.
Cut offs for ignored firms = mean +- 1*sd
= 1.01 - 1*0.66 to 1.01 + 1*0.66
= 0.35 to 1.67
Cut offs for monitored firms = mean +- 2*sd
= 1.01 - 2*0.66 and 1.01 + 2*0.66
= -0.31 and 2.33
So range is (-0.31 to 0.35) and (1.67 to 2.33)
Cut offs for restricted firms is < -0.31 or > 2.33
a) $1.00 - This falls in the ignore category.
b) $2.10 - This falls in the monitored category.
c) $0.85 - This falls in the ignored category.
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