MC090201542 MAQSOOM RAZA

Question # 1
Answer.
FV= PV*(1+ i)n
Percentage interest rate change in to decimals’ 5 %( 0.05) 1 %( 0.01)
And also 12 month into one year and applied the formula.

a) PV=100, i=5%, n = 1 year(12 months)

FV=100*(1+0.05) ^1
FV= 105

b) PV=100, i=1%, n = 1 year (12 months)

FV=100*(1+0.01) ^ 1

FV=101

Q2.
GDP deflator = nominal GDP x 100
Real GDP

YEAR NOMINAL GDP REAL GDP DDP DEFLATOR INFLATION RATE

1997 Rs,60,000 60,000 100 n.a

1998 70,100 65,200 107.51 7.50%
1999 81,200 74,600 108.84 1.25%

Question # 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%

Working
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]