Assignment:
Complete each of the following.
PART 1:
For each of the following 4 alternatives:
i) Calculate the expected value (EV) of the coin flip option and briefly explain your logic.
ii) Calculate the minimum number of successes (HEADS) for the coin flip option to equal or exceed the amount certain;
iii) Use Stat Trek to calculate the probability that the minimum number of successes above will be achieved;
iv) For each of the 3 alternatives, which option would you choose (i.e. the "coin flips" or the "amount certain")? Briefly explain?
PART 2:
Historically the S&P 500 Index has returned about 8% a year but returns are very uneven as recent experience has reminded us - the INDEX declined by more than 50% from its peak in 2007 and took 7 years to attain that peak level again. This year the S & P 500 Index has gained about 2% through today's date but with significant fluctuations. In contrast a typical Money Market Fund has returned about 2% a year with minimal fluctuation. Given these facts, evaluate the following:
a) You are considering spending several thousand dollars to purchase a common stock "S&P 500" Index Fund. Assuming that you plan to use this Fund as a house down payment in 2 years from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.
b) How risky would it be if you planned to use this "S&P 500" Index Fund as the major component of your retirement funds, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective.
c) You are considering investing several thousand dollars in a Money Market fund. If you plan to use this fund as down payment on a house in the next 6 months, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.
d) How risky would it be if you planned to use the Money Market fund as the major component of your retirement fund, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective!
Attachment:- Binomial Calculator-Online Statistical Table.rar