Please help and explain An investor wants to buy a condominium in Florida. The value of her protfolio is currently at US$1.0 million and she needs $100 000 in one year for the down payment. She doesn’t mind decreasing her capital as long as she has $950 000 remaining in her portfolio after the down payement is made. She is considering two new protfolios for her holdings. The details on the two portfolios are: Portfolio Expected Annual Return Std Devn of Return 1 17% 15% 2 12% 10% According to Roy’s Safety First Criterion, the portfolio she would prefer and the probability that this safety- first-optimal protfolio will produce a return less than 2% (assuming returns are normally distributed) are: Optimal Portfolio Prob < 2% Port 1 32% Port 1 16% Port 2 32% Port 2 16% Secondly : Is there a shorter way of working this out. Am used to solving manually for a period like ‘…at the end of second year’ though i take a few min but i get the rt answer Jim recently purchased a home for $300 000 on whihc hemade a dowmn payment of $100 000. He obtained a 30yr mortgage to finance the balance on whihc he pays a fixed annual rate of 6%. if he makes regular, fixed monthly payments, what loan balance will remain just after 48th payment? A. $94 615 B. $186 109 C. $189 229 D. $192 444 regards
First question, take the portfolio with the Higher SF criterion - in this case you need a 5% return (1m x 1.05 - 100000 = 950000) so portfolio 1 is favoured (SF = 0.8 v port 2 with SF = 0.7). The question is then asking what is the chance that you will have a result more than 1 standard deviation away from the mean - look in the Z tables and bear in mind that this is a one-tailed test (it doesnt matter if the return is more than one SD in the other direction) and you should get 16% (i havent looked this up but assume the 32% is there to trip you up if you think its a two-tailed test. Second question: (this got me the first time i saw it too). The value at the end of the 48th payment is the PV of the remaining payments. So we pump in the numbers and find out that his monthly payment is 1199.1 (remember int rate of 0.5 and n = 360). At the end of the 48th month he has 312 payments left so solve PV of n = 312, y = 0.5, pmt = 1199, fv = 0, gives 189,228.9 anyone disagree?
Agree with question 1. Question 2 can be done with the amortisation function on the BAII - enter all the TVM data, 2nd Amort, P1 = 1, P2 = 48, BAL = -188,229. Same calculation but a little bit faster.
Genius, cheers HJAA. That was MOST helpful. What’s P1 and P2 though?
P1 / 2 are the payments between which you’re measuring the interest expense and principal repaid (PRN & INT). So here P2 = 48 as we’re asked about the balance after the 48th payment.
Thanks folks, am learned now HJAA, how and where do you press BAL if u use 2nd Amort? i could only feed in up to P2 but culdnt bring the balance out thanks
if you are using BAII Plus P there are two ways to deal with Q2. Either you can hit P1 = 1 and P2 = 48, which shows you the cumulative interest/principal payments + balance or, you can hit P1 =48 and P2 = 48, which shows you what is the interest/principle payment 48th payment, and of course the balance as well.
after you enter p1 and p2 you need to circle thro’ using the down arrow.