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  • jad1148 jad1148 Nov 24, 2011 2:58 PM Flag

    25.16 % per year average for 19 years on Albertson Bonds

    Joe, once again, you prove that you are incapable of performing even the simplest financial calculation correctly.

    For your own sake, please share the following two explanations with someone you trust, who also actually knows what they are doing (i.e., someone who teaches mathematics at either the high school or community college level).


    [1] Annualizing Returns

    Joe's investment portfolio is currently worth $100,000. Ten years ago it was worth $50,000. He neither added additional capital to, or withdrawal capital from, the portfolio during the ten year period.

    Question: What was Joe's annualized return for the decade?

    Answer: = ($100,000 / $50,000 ) ^ ( 1 / 10 ) - 1 = 0.0718 = 7.18%

    Hint: If you know the "Rule of 72" you could have estimated that the answer was about 7%, i.e., a double over a ten year period.

    http://en.wikipedia.org/wiki/Rule_of_72


    [2] Compounding Probabilities

    You have a deck of 54 playing cards (include the 2 jokers).

    REPEAT
    Carefully and randomly shuffle the deck.
    Draw a single card at random from the deck.
    If that card is either of the jokers then assume that your bond has defaulted and that you have lost the money you had invested in it.
    UNTIL the game has been played a total of 19 times.

    Note that the probability of drawing a joker is two in fifty-four, so I am simulating a one year default probability of about 3.7%. You must play this game 19 times to represent the 19 consecutive years that you intend to hold that bond while you wait for it to mature.

    Question: What is the likelihood that you will draw a joker at least once during the 19 trials?

    Answer = 1 - ( 2 / 54 ) ^ 19 = 1.00 = 1 - 6.37e-28 = ~1 = ~100%

    Obviously it is possible to play this game and not draw a joker, but the likelihood is that you will.

 
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