Financial/Analytical Question #4: (FAQ#4). You should specifically identify any assumptions that you make and justify the decision(s) made.

Complete each of the following.

PART 1:

For each of the following 4 alternatives:

i) calculate the expected value (EV) of the coin flip option and briefly explain your logic. Note the amount certain is also an expected value (EV);

ii) calculate the minimum number of successes (HEADS) for the coin flip option to equal or exceed the amount certain;

iii) use Stat Trek to calculate the probability that the minimum number of successes above will be achieved;

(HINT: Google “Stat Trek Binomial Calculator”)

iv) for each of the 3 alternatives, which option would you choose (i.e. the “coin flips” or the “amount certain”)? Briefly explain?

ALTERNATIVE#1

a) $50,000

OR

b) 10 coin flips each of which has a

i) 50% chance of $8,500 (Heads)

ii) 50% chance of $2,500 (Tails)

EV = $ (for 10 flips)

MINIMUM NUMBER OF SUCCESSES =

STAT TREK PROBABILITY =

YOUR CHOICE of the amount certain or the Coin Flips = (brief explanation)

ALTERNATIVE#2

. a) $50,000

OR

b) 100 coin flips each of which has a

i) 50% chance of $750 (Heads)

ii) 50% chance of $100 (Tails)

EV = $ (for 100 flips)

MINIMUM NUMBER OF SUCCESSES =

STAT TREK PROBABILITY =

YOUR CHOICE of the amount certain or the coin Flips = (brief explanation)

ALTERNATIVE#3

.a) $50,000

OR

b) a 1000 coin flips with a

i) 50% chance of $76 (Heads)

ii) 50% chance of $25 (Tails)

EV = $ (for 1000 flips)

MINIMUM NUMBER OF SUCCESSES =

STAT TREK PROBABILITY =

YOUR CHOICE of the amount certain or the coin Flips = (brief explanation)

Binomial Calculator: Online Statistical Table

Use the Binomial Calculator to compute individual and cumulative binomial probabilities. For help in using the calculator, read the Frequently-Asked Questions or review the Sample Problems.

To learn more about the binomial distribution, go to Stat Trek’s tutorial on the binomial distribution.

PART 2:

Historically the S&P 500 Index has returned about 8% a year but returns are very uneven as recent experience has reminded us – the INDEX declined by more than 50% from its peak in 2007 and took 7 years to attain that peak level again. This year the S & P 500 Index has gained about 2% through today’s date but with significant fluctuations. In contrast a typical Money Market Fund has returned about 2% a year with minimal fluctuation. Given these facts, evaluate the following:

a) You are considering spending several thousand dollars to purchase a common stock “S&P 500” Index Fund. Assuming that you plan to use this Fund as a house down payment in 2 years from now, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.

Very low Very high

risk ____ ____ ____ ____ ____ ____ ____ risk

1 2 3 4 5 6 7

b) How risky would it be if you planned to use this “S&P 500” Index Fund as the major component of your retirement funds, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective.

Very low Very high

risk ____ ____ ____ ____ ____ ____ ____ risk

1 2 3 4 5 6

c) You are considering investing several thousand dollars in a Money Market fund. If you plan to use this fund as down payment on a house in the next 6 months, how risky would you consider this investment? Briefly discuss your perception of risk in this decision, given your objective.

Very low Very high

risk ____ ____ ____ ____ ____ ____ ____ risk

1 2 3 4 5 6 7

d) How risky would it be if you planned to use the Money Market fund as the major component of your retirement fund, 40 years from now? Briefly discuss your perception of risk in this decision, given your objective!

Very low Very high

risk ____ ____ ____ ____ ____ ____ ____ risk

1 2 3 4 5 6 7

.

In each of the above describe your specific objective.

The submission is due at 9 PM, Tuesday, 3/27/18. (Use Messages function on BB). You may submit on an individual basis or in collaboration with 1 other member of your Team. You may collaborate on a FAQ with a specific student no more than once.

Either type answers in MSWord or scan to a pdf file. Do not use JPEG!

Note: 1 point may be deducted for each hour, or part thereof, that a submission is late, with a maximum of 5 points per 24 hours. This is based on 20 points per question!