Ask Basic Finance Expert

a) Calculate the average rates from your samples. Make sure that the average rate is what you expect. Using the average rates of return (not individual samples), what is (are) the best the investment (s)?

b) Use the 5000 sample rates to perform a Monte Carlo Estimate. Below the last sampe of returns for each investment, calculate the mean return using the "average()" function, and select the entire column of sample returns. Based on the expected value of the net profit after 10 years, which investment is the best choice?

c) Create a graph with the Cumulative Distribution Functions (CDFs) of the three investments on a single graph, by following these steps:

a. Copy the 5000 samples of returns from the three investment choices at the same time, select a new worksheet, and "paste-as-values". This should give you three columns with 5000 rows. Make sure if click on one of the cells, it is a number, not a formula.

b. Sort each of the columns from smallest to largest. Sort the columns independently, not at the same time.

c. Create a fourth column for the cumulative probability, or "P". The first row should contain "=1/5000". The remaining rows should contain the formula for "= + 1/5000". This should produce a column of numbers that increase linearly to a value of "1.0".

d. Insert a chart in excel: choose "scatterplot" type, "scatter with straight lines" subtype. Plot each column of sorted returns vs. P, all on the same chart.

e. To make it easier to analyze the graph, use the "Format Axis" dialog for the X-Axis, and make the maximum value "50000".

Question: Are any of the investment choices stochastically dominant? Looking at this graph, can you imagine a reason why you might choose

a different investment than the one with the highest mean return - if so, what is it and why?

d) Go back to the original worksheet with the samples of returns. Create a table of summary statistics for the three investments starting at worksheet row "5008" or anywhere below the last row of samples, and after your calculation of the mean for part a). Calculate each of the following using the indicated excel function. means select the entire column of 5000 samples, and use the cell range in the formula.

a. P0.05 (5th percentile): "=percentile(,0.05)"

b. P0.5 (median): "=percentile(,0.5)"

c. P0.95 (5th percentile): "=percentile(,0.05)"

d. Number of cases that lose money (i.e., returns are less than the original $10,000):
"countif(,"<10000")

e. Fraction of cases that lose money (i.e., returns are less than the original $10,000):
Divide the cell above by 5000.

Question: Would any of this information change your recommendation for the best investment from your answer in part a)? If so, what information and why? Explain your reasoning.

e) Create another column that indicates the best investment with "H"=High-risk stock, "L"=low-risk stock, "S"=savings (hint, if your resulting earnings were in cells F4, F5, and F6, respectively, then the formula would be "=IF(AND((F4>F5),(F4>F6)),"H",IF((F5>F6),"L","S"))".

Is the savings account ever the best investment for a particular sample? If so, what is the probability that the savings account is the best choice? Does this change your recommendation for which investment to choose?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91414650
  • Price:- $50

Priced at Now at $50, Verified Solution

Have any Question?


Related Questions in Basic Finance

Question utilizing the concepts learned throughout the

Question: Utilizing the concepts learned throughout the course, write a Final Paper on one of the following scenarios: • Option One: You are a consultant with 10 years experience in the health care insurance industry. A ...

Discussion your initial discussion thread is due on day 3

Discussion: Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your r ...

Question financial ratios analysis and comparison

Question: Financial Ratios Analysis and Comparison Paper Prior to completing this assignment, review Chapter 10 and 12 in your course text. You are a mid-level manager in a health care organization and you have been aske ...

Grant technologies needs 300000 to pay its supplier grants

Grant Technologies needs $300,000 to pay its supplier. Grant's bank is offering a 210-day simple interest loan with a quoted interest rate of 11 percent and a 20 percent compensating balance requirement. Assuming there a ...

Franks is looking at a new sausage system with an installed

Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped ...

Market-value ratios garret industries has a priceearnings

(?Market-value ratios?) Garret Industries has a? price/earnings ratio of 19.46X a. If? Garret's earnings per share is ?$1.65?, what is the price per share of? Garret's stock? b. Using the price per share you found in par ...

You are planning to make annual deposits of 4440 into a

You are planning to make annual deposits of $4,440 into a retirement account that pays 9 percent interest compounded monthly. How large will your account balance be in 32 years?  (Do not round intermediate calculations a ...

One year ago you bought a put option on 125000 euros with

One year ago, you bought a put option on 125,000 euros with an expiration date of one year. You paid a premium on the put option of $.05 per unit. The exercise price was $1.36. Assume that one year ago, the spot rate of ...

Common stock versus warrant investment tom baldwin can

Common stock versus warrant investment Tom Baldwin can invest $6,300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $30 per share. Its warrants, which provide f ...

Call optionnbspcarol krebs is considering buying 100 shares

Call option  Carol Krebs is considering buying 100 shares of Sooner Products, Inc., at $62 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the price ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As