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Sir could u please tell me while calculating MIRR why have they used incomplete formula.I mean (pvr/pvi)1/n(1+re)-1 so where is this (1+re) gone.And in same question can you please explain part (c) from where did this 2.33 came,i am finding this topic really difficult about this confidence level and all,if u could please put some lecture aswell on this topic that will b great. Thanks
The examiner has not used an incomplete formula – he has multiplied by 1.1275. (Maybe you are looking at the alternative way of calculating it, which is not needed for the exam but is allowable)
For 99% confidence, we need to know how many standard deviations we can be away from the average such that there is a 1% chance of being further away. The normal distribution is symmetrical so there is 50% about the average and for a total of 99% we need 49% below the average.
So we look backwards in the tables to see how many standard deviations give an answer of 0.49 (49%).
If you look in the tables, you will find that 2.30 gives an answer of 0.4893; 2.31 gives an answer of 0.4896; and so on. We want the answer to be 0.49 and the nearest to this is 2.33 which gives 0.4901.There is page in the free revision notes which briefly explains this (although I have just noticed that there is a typing error in the very last line – for 2.58 it should read 2.33. I will have it changed immediately).
The examiner has not used an incomplete formula – he has multiplied by 1.1275. (Maybe you are looking at the alternative way of calculating it, which is not needed for the exam but is allowable)
For 99% confidence, we need to know how many standard deviations we can be away from the average such that there is a 1% chance of being further away. The normal distribution is symmetrical so there is 50% about the average and for a total of 99% we need 49% below the average.
So we look backwards in the tables to see how many standard deviations give an answer of 0.49 (49%).
If you look in the tables, you will find that 2.30 gives an answer of 0.4893; 2.31 gives an answer of 0.4896; and so on. We want the answer to be 0.49 and the nearest to this is 2.33 which gives 0.4901.There is page in the free revision notes which briefly explains this (although I have just noticed that there is a typing error in the very last line – for 2.58 it should read 2.33. I will have it changed immediately).
Sir,
For five year VAR = $1,864,000 x 5 to power 0.5 = $1,864,000.
Why is 5 raised to power 0.5? it a standard formula or what?
Thanks.
Something to the power 0.5 is another way of writing the square root of something.
( 4 ^ 0.5 = square root of 5)It is because we can add variances but not add standard deviations.
The variance is the standard deviation squared.
So the total 5 year variance = 5 x (1 year standard deviation)^2
So the total 5 year standard deviation = (square root of 5) x (1 year standard deviation)
I suggest that you watch the free lecture on Value at Risk, where this is explained.
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