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Lesson 5: We can divide our histogram into deciles.
If we include the few little squares that lie above and below the outline we've drawn, we see that prices in this histogram range from a low of around $41 to a high of around $331.
If this histogram represents where we think the price of this stock might be a year from now, we might want to know the probability that the price will be above a certain level.
To get a better idea of the probability that the stock price will be above or below a given level, we can divide the histogram into ten sections or deciles. Each decile will contain approximately the same number of little squares.
To see how we can divide our histogram into deciles, let's build it again and divide it up.
Type 5 in the Run Lesson Number box. Click Run Lesson Number.
If this histogram represents where we think the price of this stock might be a year from now, then we can say that we think there's one chance in ten that the price will be in any given color band or decile.
When it builds a histogram or draws a probability distribution, the simulator uses 2,000 little squares. Hence, when we divide a histogram into deciles, each decile contains 200 little squares.
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Option Pricing: Black- Scholes Made Easy
or with author and developer Jerry Marlow
jerrymarlow@jerrymarlow.com
(917) 817-8659
www.jerrymarlow.com
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