MAF307 Equities and Investment Analysis

T1 2016 – Week 1

Tutorial Solutions

1. An investor wants to have $25 million to retire 25 years from now. If she is planning
to invest a lump sum amount today, how much would she have to invest? The annual
rate of return on her investment is 4 per cent compounded quarterly.

FV = $25000000
n = 25 x 4 = 100 quarters
I = 4% pa = 1% per qrt

PV = 25000000/(1+0.01)^100 = $ 9,242780.31

2. Rebeca has a property in Melbourne that she wishes to lease. An agent by the name of
Robert has a tenant who is prepared to pay $30000 up front for a 1-year lease. Robert
will be paid a commission of 7 per cent of any value paid for the rental. Another agent,
Simone, has a tenant who will pay $2700 per month and the agent will take her 7.5
per cent commission over any payment made. The comparable discount rate is 6
per cent per annum compounded monthly. Which agent should Rebeca select?

The value of the rental payments received from Tom’s prospective tenant.

PV = $30000 × (1−0.07) = $27900

The value of the rental payments received from Simone’s prospective tenant.

𝐶𝐶𝐶𝐶 1
𝑃𝑃𝑃𝑃𝑃𝑃𝑛𝑛 = × �1 − �
𝑖𝑖 (1 + 𝑖𝑖)𝑛𝑛

CF = 2700 (1-0.075) = 2497.5

i = 0.06/12

n = 12

PVA = $29018.28
3. A picture has a height that is 4/3 its width. It is to be enlarged to have an area
of 192 square inches. What will be the dimensions of the enlargement?

• Let "w" stand for the width of the picture. The height h is 4/3 the width, so h = (4/3)w. Then
the area is A = hw = [(4/3)w][w] = (4/3)w2 = 192. I need to solve this "area" equation for
the value of the width, and then back-solve to find the value of the height.
• (4/3)w2 = 192
w2 = 144
w = ± 12
• Since I can't have a negative width, I can ignore the "w = –12" solution. Then the width must
be12 and the height is h = (4/3)(12) = 16.
• The enlargement will be 12 inches by 16 inches.

4. In first 4 tests John’s average score was 79. In remaining 2 tests he scored 100 each,
what’s his new average test score?

Total score in first 4 tests = 4 x 79 = 316

Total score after 6 tests = 4 x 79 + 2 x 100 = 516
Average score after 6 tests = 516 / 6 = 86

5. What are the mean, median, mode and standard deviation of the following sample of
numbers? 1,7, 6, 1, 9, 5, 1

Mean = (1+7+6+1+9+5+1) / = 30 / 7 = 4.285

Observation in ascending order: 1, 1, 1, 5, 6, 7, 9
Median = number that separate upper half of the observation from the lower half = 5
Mode = most frequent observation = 1

( )
n 2
∑ ri − r
1
Standard Deviation = =
n −1
(1 − 4.28) 2 + (7 − 4.28) 2 + (6 − 4.28) 2 + (1 − 4.28) 2 + (9 − 4.28) 2 + (5 − 4.28) 2 + (1 − 4.28) 2
(7 − 1)

= 3.302236 ~ = 3.30
6. In a recent cricket match, the number of boundaries scored by the players is described
by the following probability distribution.

Number of boundaries, x 0 1 2 3 4

Probability, P(x) 0.10 0.20 0.30 0.25 0.15

What is the average number of boundaries hit by the players? What’s the standard
deviation of this distribution?

The mean of the probability distribution is 2.15, as defined by the following equation.

E(X) = Σ [xi * P(xi) ]

E(X) = 0*0.10 + 1*0.20 + 2*0.30 + 3*0.25 + 4*0.15 = 2.15

Variance = .01 x (0-2.15)^2 + 0.2 x (1 – 2.15)^2 + 0.3 x (2 – 2.15)^2 + 0.25 x (3 –

2.15)^2 + 0.15 x (4 -2.15)^2 = 1.4275

SD = Variance = 1.19478

7. Consider the data in Table 1. Use MS Excel to answer the following questions:

(a) Display the data in a scatterplot and comment about the relationship between these
two variables.

Calculate the correlation between X and Y. Does this suggest anything about fitting a
simple linear regression to the data?

(b) Fit a simple linear regression to the data with an intercept. Add the fitted regression
line to the scatterplot of the data.

Table 1:
X 5 -4 -3 -2 -1 0 1 2 3 4 5
Y 1 5 4 7 10 8 9 13 14 13 18

This is left for students to try on their own.