To meet a predetermined liability which needs a 6.0% return. Which of the choices below would be best in pursuit of the goal ? An immunized strategy with a target return equal to : A. 6.0% with a 95% confidence interval at +/- 10 basis points. A. 6.0% with a 99% confidence interval at +/- 20 basis points. A. 6.0% with a 95% confidence interval at +/- 40 basis points.
Are you sure those are the correct numbers in this question? I think i remember a question like this but the choices were 6.6% or something.
C? Guessing here Wider is better and provide more room for volatility.
Sorry for my mistake, the choices are : A. 6.0% with a 95% confidence interval at +/- 10 basis points. B. 6.0% with a 99% confidence interval at +/- 20 basis points. C. 6.4% with a 95% confidence interval at +/- 40 basis points.
and the answer is?
Answer is C…you are guaranteed the 6% return with 95% probability. Not so in the other two. Right AMC?
The correct answer is C. But I don’t get it well. Can anyone explain ?
My question point is CI is irrelevant ? e.,g : 6.4% with a “95%” confidence interval at +/- 40 basis points is same as 6.4% with a “99%” confidence interval at +/- 40 basis points ?
A: 95% probability of getting 5.9% or 6.1%. But you need to make sure you got 6% because thats the required return. B: 99% probability of getting 5.8% or 6.2%. But you need to make sure you got 6% because thats the required return. C: 95% probability of getting 6% or 6.4%. Here, you can’t lose. You get your 6% even if lose.
I think, just to clarify, for B, the Ci should be 95%??? Otherwise, like you said, there will be discrepancies with the analysis.
In B, CI is 99%. So what’s difference between 95% & 99% for B ?
99% you are almost giving you guarantee that it will be at 6% but at 95% CI, you are leaving some room that it may not achieve.
The answer is definately C Hypothetical question: If you had to choose between A & B, would the answer be A for the following reason if a 99% probability is ± 20 basis, then a 95% probability is ±14 basis calcualted as 20/2.33*1.65 (assuming normal distribution)
So, for C : CI of 99% is better for CI of 95% ?
Lets put it this way, I think for B, EVEN with 99% CI you have a chance of earning below the required return. In C, even with 95% CI, you are sure of getting the required return, which means returns must be much higher with a 99% CI. Does that make sense? Pls. correct me if I am wrong here.
sparty419, OK, I get it now. TKVM !