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Building Options at Project Front-End Strategizing: The Power of Capital Design for Evolvability by Nuno Gil, Guilherme Biesek

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APPENDIX D

Estimating Volatility from Historical Data

The volatility in the number of days of road closure is calculated in the same way the volatility of a stock price can be empirically obtained by observing fixed intervals of time (Hull, 2009). Based on the records from the environment agency, Table 1 shows the number of days of road closure from 1988 to 2002 and the associated total costs (Ct) as a function of road closure.

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The yearly return (ui) is calculated by:

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The volatility is given by:

From equation 2 and 15 observations (n), the ...

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