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Discussion in 'Risk Management' started by Soon2Bgreat, Jan 29, 2012.

1. newwurldmn

#21     Jan 30, 2012
2. bwolinsky

You people have no clue what you're talking about.

You guys are wasting my time, and if the op ignores the right answer, he will never know if he's being advised by stupids that don't understand basic compounding.

#22     Jan 30, 2012
3. Soon2Bgreat

Haha, this is true and a good way to look at it IMO.

...S2007S is right, shouldn't be much debate over this.

#23     Jan 30, 2012
4. Martinghoul

Hahaha, bwol's mad CFA skills kicking in again, leaving everyone in the dust!!? Nice to see... It's good to know that there's a universe out there where a loss of 50% means you divide by 1.5. There's hope for me yet !

And, btw, folks, it ain't "communitive", it's "commutative".

#24     Jan 30, 2012

Agreed, but just one last clue for Beau.

1/1.5 round to .67

That's a loss of 33%.

#25     Jan 30, 2012
6. bwolinsky

This is a quant math question, that I've given the right answer to.

Would you rather lose a lot later, and gain the same, or would rather gain a lot sooner, then lose a lot.

They're path dependent. They're mathematical results calculated exactly as 1.2^4 which happens first, divided by 1.5 to account for the effects of compounding on the portfolio, then if you start from 0.5. The first four years in the earlier compounding period have a lot more money to compound on because they haven't lost 50% in the first period.

<b><i><u>OP: (1.2^4/1.5)-1=1.3824-1=.3824=38.24%>(0.5*1.2^4)-1=1.0368-1=.0368=3.68%.

Anyone giving the same as the answer is ignoring the effects of compounding, and does not know what they're talking about.

I guarantee this is the right answer. Everyone else does not understand what the effects of losing first then winning are compared to winning first then losing and aren't CFA Candidates.

OP:The above is your answer. Ignore anyone else who hasn't showed you the correct mathematics, path dependency, and compounding calculations.

#26     Jan 30, 2012
7. newwurldmn

There's a case for wanting the loss first:

It's possible that there was a kink in the system that caused the loss and then that kink was corrected. Whereas if you had 4 good years and then a loss, who knows what will happen next. This is if you believe that the returns are auto-correlated.

Since no further information is given, it would be a fair talking point in explaining your rationale.

#27     Jan 30, 2012

Path1 => P:1000, Y1:500, Y2:600,Y3:720,Y4:864,Y5:1036.8

Path 2 => P:1000, Y1:1200, Y2:1440, Y3: 1728, Y4:2073.6, Y5:1036.8

What did you do to the FONTS, Beau. Why can't I remove the underline.

It is just this, Beau, FV = PV(1+I)^n.

#28     Jan 30, 2012
9. bwolinsky

All right. I don't know why what I was doing didn't work like that, but they are the same. Done it twice in my calculator in addition to an e-mail.

Case A:

End of year 1 you have: \$1000*1.2 = \$1200
End of year 2 you have: \$1200*1.2 = \$1440
End of year 3 you have: \$1440*1.2 = \$1728
End of year 4 you have: \$1728*1.2 = \$2073.6
End of year 5 you have: \$2073.6*.5 = \$1036.8

Case A:
End of year 1 you have: \$1000*.5 = \$500
End of year 2 you have: \$500*1.2 = \$600
End of year 3 you have: \$600*1.2 = \$720
End of year 4 you have: \$720*1.2 = \$864
End of year 5 you have: \$864*1.2 = \$1036.8

#29     Jan 30, 2012
10. Martinghoul

Don't you see it? I get it now, it's obvious!! It's the CFA, that's the secret ingredient! Say, you start with \$1000 and you lose 50%. Normal people would end up with \$500, but not CFA candidates. CFA candidates end up with \$1000/1.5 = \$666 (which isn't a coincidence, 'cause CFA is of the DEVIL).

EDIT: Oh no, bwol has found the bug!!!! Rejoice, ye all! The non-CFA and CFA universes converge!!!!!

#30     Jan 30, 2012
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