This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Solution to Problem Set 1 Investments Prof. PierreOlivier Weill 1. (a) Allowing you to reinvest at 1% per day means that you are earning compound interest on your initial $100 investment. The formula for P growing to F for one year at a compound rate r per annum is: F = P parenleftbigg 1 + r n parenrightbigg n where n is the number of compounding periods per year and hence r/n is the rate per compounding period. We are given r/n = 1% per day and are asked to calculate the annual yield. This is equivalent to asking for the effective annual rate. EAR = (1 + . 01) 250 1 = 11 . 0321 Multiplying by 100 puts this into percentage terms: 1103.21% per annum. Looked at another way, investing $100 in the hedge fund produces $100(1 + . 01) 250 = $1203 . 21 at the end of one year. (b) If the hedge fund manager insists on putting your daily 1% earnings into a zerointerest bearing checking account, then you will earn only the daily rate (1%) multiplied by the number of days, or, 1% × 250 = 250% Notice that this is equivalent to the annual percentage rate (APR) calculation:...
View
Full
Document
This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.
 Spring '08
 Miyakawa

Click to edit the document details