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(solution) FALL 2016 MAR 4804/U04 (Thurs.) Financial/Analytical Question #3:


I am attaching the problems to this, this assignment is a Risk Exercise with different scenarios. This is for a Marketing Strategy class. Your help will be appreciated. Thank you!


FALL 2016 MAR 4804/U04 (Thurs.) Financial/Analytical Question #3: (FAQ#3). You should specifically

 

identify any assumptions that you make and justify the decision(s)

 

made.

 

Complete each of the 3 Exercises below. EXERCISE #1: Assuming that you are a RISK TAKER,

 

For each of the following alternatives choose one of the 2

 

options by circling either a) or b). For each choice calculate

 

the expected value (EV) and briefly explain your logic. 1. a) $50,000 OR

 

b) a coin single flip with a i) 50% chance of $90,000 (Heads) ii) 50% chance of $30,000 (Tails) EV = $

 

2. a) $50,000 OR

 

b) 10 coin flips each of which has a

 

i) 50% chance of $8,500 (Heads) ii) 50% chance of $2,500 (Tails) EV = $ 3. a) $50,000 OR

 

b) 100 coin flips each of which has a i) 50% chance of $750 (Heads) ii) 50% chance of $100 (Tails) EV = $ EXERCISE #2: Assuming that you are RISK AVERSE,

 

For each of the following alternatives choose one of the 2 options by

 

circling either a) or b). For each choice calculate the expected value

 

(EV) and briefly explain your logic of your choice.

 

1. a) $50,000 OR

 

b) a single coin flip with a

 

i) 50% chance of $90,000 (Heads) ii) 50% chance of $30,000 (Tails) EV = $ 2. a) $50,000 OR

 

b) 10 coin flips each of which has a

 

i) 50% chance of $8,500 (Heads) ii) 50% chance of $2,500 (Tails) EV = $ 3. a)

 

OR $50,000 b) 100 coin flips each of which has a

 

i) 50% chance of $900 (Heads) ii) 50% chance of $300 (Tails) EV = $

 

NOTE: you can use the binomial distribution to assess the probabilities

 

associated with each of the above 6 options. EXERCISE #3:

 

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 initially

 

declined more than 10% but has since recovered its losses. In contrast a typical Money Market

 

Fund has returned about 2% a year with minimal fluctuation. Given this, 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, !

 

Very low

 

risk ____

 

1 ____

 

2 ____

 

3 ____

 

4 ____

 

5 ____

 

6 ____

 

7 Very high

 

risk 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.

 

Very low

 

risk ____

 

1 ____

 

2 ____

 

3 ____

 

4 ____

 

5 ____

 

6 ____ Very high

 

risk 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 2 years, how risky would you consider this

 

investment? Briefly discuss your perception of risk in this decision, given your objective.

 

Very low

 

risk ____

 

1 ____

 

2 ____

 

3 ____

 

4 ____

 

5 ____

 

6 ____

 

7 Very high

 

risk 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!

 

Very low

 

risk ____

 

1 ____

 

2 ____

 

3 ____

 

4 ____

 

5 .

 

In each of the above describe your specific objective. ____

 

6 ____

 

7 Very high

 

risk

 


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