Question: 2. An analyst wants to estimate the continuously compounded expected return a and the volatility o of the stock of NTH Ltd. He observed

2. An analyst wants to estimate the continuously compounded expected return a and the volatility o of the stock of NTH Ltd. He observed the movement of the stock price for a period of time and found that the ratio St/St, where St denotes the price of a share of NTH Ltd. at a particular time point t and St+ 1 is the stock price one month from t, has an expected value of 1.007 and variance 0.0055. Suppose the stock pays no dividend, compute the method of moment estimates of a and (i.e., to solve a and o by equating E[S+/St] and Var[St+/St] with the observed values). 12 12

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