W
wasif_hyder
Member
Hi,
I have one confusion regarding part 1.
The problem is, I assumed this to be a question asking the expected value of the accumulation, and therefore proceeded to solve it by calculating it over all possible values of the interest rates, like this
(in millions)
1 * (1.07*0.5 +1.03*0.5) * (1.02*0.3 + 1.04*0.4 + 1.06*0.3 )
This gave the answer of 1,494,477.
The marking scheme calculates it using a single expected value of the interest, and I feel you are aware of how it goes.
The problem here is, both approaches are different, and should not yield the same answer. But they do, i.e 1494477. As a matter of fact (1.07*0.5 + 1.03*0.5) results in the same rate of interest as (0.07*0.05 + 0.03*0.5) i.e 5%
This raises a number of questions. Firstly, these are two distinct approaches that are not supposed to be equal. This may be a rather unusual case however.
Apart from that, the question mentioned the expected value of the fund, which, to me, implied calculating over all possible rates of interest. Why, then, is a single expected rate of interest being used. And how would I know which of the two approaches to use, given my confusion to this situation.
Considering that I interpreted the question correctly, or am wrong, but happen to get the correct answer. Would I lose any marks ?
This is a rather confusing thing, and I would greatly appreciate any help.
Am I missing something ???
Thank you for your help.
Kind Regards.
I have one confusion regarding part 1.
The problem is, I assumed this to be a question asking the expected value of the accumulation, and therefore proceeded to solve it by calculating it over all possible values of the interest rates, like this
(in millions)
1 * (1.07*0.5 +1.03*0.5) * (1.02*0.3 + 1.04*0.4 + 1.06*0.3 )
This gave the answer of 1,494,477.
The marking scheme calculates it using a single expected value of the interest, and I feel you are aware of how it goes.
The problem here is, both approaches are different, and should not yield the same answer. But they do, i.e 1494477. As a matter of fact (1.07*0.5 + 1.03*0.5) results in the same rate of interest as (0.07*0.05 + 0.03*0.5) i.e 5%
This raises a number of questions. Firstly, these are two distinct approaches that are not supposed to be equal. This may be a rather unusual case however.
Apart from that, the question mentioned the expected value of the fund, which, to me, implied calculating over all possible rates of interest. Why, then, is a single expected rate of interest being used. And how would I know which of the two approaches to use, given my confusion to this situation.
Considering that I interpreted the question correctly, or am wrong, but happen to get the correct answer. Would I lose any marks ?
This is a rather confusing thing, and I would greatly appreciate any help.
Am I missing something ???
Thank you for your help.
Kind Regards.