MGT411 ass#1

Assignment 1
Fall 2009
Money and Banking (MGT411)
Last Date of Submission: November 10, 2009
Marks: 20

Question # 1 (Marks 4)

Determine the future value of an investment of Rs.100 for 12 months at the following interest rates:
a- 5%
b- 1%

Question # 2 (Marks 6)


According to the data given below, calculate the GDP deflator and inflation rate.



Years
Nominal GDP
Real GDP
GDP deflator
Inflation rate
1997
Rs. 60,000
Rs. 60,000


1998
70,100
65,200


1999
81,200
74,600




Question # 3 (Marks 10)
Assume that the economy can experience high growth, normal growth, or recession. You
expect the following stock-market returns for the coming year under these conditions:



State of the Economy
Probability
Return
High Growth
0.3
+30%
Normal Growth
0.4
+12%
Recession
0.2
-15%


a. Compute the expected value of a Rs.1000 investment both in dollars and as a
percentage over the coming year.
b. Compute the standard deviation of the return as a percentage over the coming
year.
c. If the risk-free return is 7 percent, what is the risk premium for a stock market
investment?


____________________________________________________





JUST GET IDEA FROM THESE SOLUTIONS:





Question # 1



FV=PV*(1+i) ^n

(a)
PV=100, i=5%, n = 1 year(12 months)
FV=100*(1+.05) ^1
FV=Rs.105
(b)
PV=100, i=1%, n=12 months = 1 year
By putting the values:
FV=100*(1+.01) ^1
FV=Rs.101
Question# 2

Years
Nominal GDP
Real GDP
GDP Deflator
Inflation Rate

1997
Rs. 60000
Rs. 60000
100.0
n.a

1998
70100
65200
107.98
7.98

1999
81200
74600
108.85



Working:
GDP for year 1997 = (Nominal GDP / Real GBP)*100
= (60000/60000 )*100= 100
Rest Calculate yourself: P
Inflation Rate for year 1998 = (GDP deflation for year 1998/ GDP deflation for year 1999)*100
=(107.98-100)/100
= 0.079755*100 = 7.98
Rest Calculate yourself: P
Question # 3

Expected Value = 0.3(1000)(1+30%) + 0.4(1000)(1+12%) + 0.2(1000)(1-
15%) = 1008
Expected Return = 0.3(30%) + 0.4(12%) + 0.2(-15%) = 10.8%

Standard Deviation= nahi ata :D

c. Risk Premium =10.8% - SD = answer
.................




Assume that the economy can experience high growth, normal grow
recession.You expect the following stock-market returns for the coming y
dertheseconditions
Stateofthe
Economy.....................Probability..................................Return
HighGrowth..................... 0.2........................................+30%
NormalGrowth...................0.7 ......................................+12%
Recession ................... 0.1......................................-15%



A .Compute the expected value of a $1000 investment both in dollars
as a percentage over the coming year. Answer:Given the ab
information,we can construct a frequency distribution of
payo pro leofthisinvestment.
Stateofthe

Economy..................................Probability....................................Payof
HighGrowth .................................0.2...........................................$1300
NormalGrowth .............................0.7...........................................$1120
Recession.....................................0.1..........................................$850
Given this we can construct the expected payo from this investment
EV =(1300 * .2)+(1120 * .7)+(850 * .1)

EV =$1129
We n da expected valueof $1129 or and expected pro tof $129
which as a percentage of the initial investmentis 129 /1000 =12:9%:


--------------


Solution number 3.....


Answer:
a. Expected Value = 0.3(1000)(1+30%) + 0.4(1000)(1+12%) + 0.2(1000)
(1-15%) = 1008
Expected Return = 0.3(30%) + 0.4(12%) + 0.2(-15%) = 10.8%

b. Standard Deviation
= 0.3(30 -12.9%)2 + 0.4(12 -12.9%)2 + 0.2(-15 -12.9%)2
= 87.723 + 0.324 + 155.682
= 243.729
Take Under root of above Value..
=15.611


c. Risk Premium = 10.8% - 7% = 3.8%

_____________



b. Compute the standard deviation of the return as a percentage over the coming year.


Standard deviation is the square root of the variance

• At first we have to find out the Variance:
TO FIND THE VARIANCE WE HAVE TO TAKE FEW STEPS:
STEP: 1
To compute the expected value:
Expected Value =Sum of payoffs times probabilities

Expected Value = 0.3(1000) (1+30%) +0.4(1000) (1+12%) +0.2(1000) (1-15%)
= 1008
STEP: 2
Subtract expected value from each possible payoff
390 – 1008 = -618
448 – 1008 = -560
170 – 1008 = -838
STEP: 3
Square each of the Result
$-618^2 = 381,924(dollars) ^2
$-560^2= 313,600(dollars) ^2
$-838^2 = 702,244(dollars) ^2
STEP: 4
Multiply each result times its probability and adds up the results:
.3(381,924($) ^2) + .4(313,600($) ^2) + .2(702,244($) ^2)
=114577($) ^2 + 125440($) ^2=140449($) ^2
Variance = 380466($) ^2
Thus,
The standard deviation is the square root of the variance
Standard Deviation = 1/2 [380466(dollars) ^2]

Standard Deviation = $616.9