Probability Question Without Knowing the Distribution

[Drewau2005]

Hello

Thank you to the contributors on this forum.
My question is not a homework question but rather concerns an idea I have been thinking of for some time.

Suppose there are two parties to an agreement whereby one party agrees to pay the other party a sum of money, should an asset not appreciate in a value by a percetage (say 5%) over a period of time (say 2 years).

How do you work out the probability of the asset increasing value by 5% ?

Many thanks in advance

Drew

 

[robert Ihnot]

Wouldn't it have something to do with what is the asset? And even then you would have to be pretty good to figure that--expecially if you had to also make a profit.

 

[tacman]

Hi Drew,

Thank you for your question. Calculating the probability of an asset increasing in value by a certain percentage over a period of time can be a bit tricky without knowing the distribution of the asset's returns. However, there are some methods that can give you an estimate of the probability.

One approach is to look at historical data of the asset's returns and see how often it has increased by 5% or more over a 2-year period. This can give you an idea of the likelihood of the asset increasing in value by that percentage.

Another approach is to use a simulation method, where you randomly generate possible returns for the asset and see how often it meets the 5% increase criteria. This can give you a range of probabilities based on different possible scenarios.

It is also important to consider any external factors that may impact the asset's value, such as market conditions or company performance. These can also affect the likelihood of the asset increasing in value by 5%.

Overall, without knowing the distribution of the asset's returns, it may be difficult to accurately calculate the probability. However, using historical data and simulation methods can give you a rough estimate. It may also be helpful to consult with a financial expert for a more accurate assessment.