8. Foundational Probability Concepts and Their Applications

Activity 8.01: Using the Normal Distribution in Finance

Solution:

Perform the following steps to complete this activity:

1. Using pandas, read the CSV file named MSFT.csv from the data folder:

   import pandas as pd
   import numpy as np
   import scipy.stats as stats
   import matplotlib.pyplot as plt
   %matplotlib inline
   msft = pd.read_csv('../data/MSFT.csv')

2. Optionally, rename the columns so they are easy to work with:

   msft.rename(columns=lambda x: x.lower().replace(' ', '_'),\
               inplace=True)

3. Transform the date column into a proper datetime column:

   msft['date'] = pd.to_datetime(msft['date'])

4. Set the date column as the index of the DataFrame:

   msft.set_index('date', inplace = True)

5. In finance, the daily returns of a stock are defined as the percentage change of the daily closing price...