MAFA - Mutual funds (HELP)

CA Final 1519 views 6 replies

Guest

Hello friends, plz provide about the compounded annula growth rate (CAGR)WRT to foll CAGR=(TOTAL RETURN+Initial Investment)/Intial Invest)1/n-1 Example from Mutual Fund chapter [137+40)/40]^1/5-1 =4.425^1/5-1 = 1.3464-1=0.3464 I can't understand the calc of 4.425^1/5 which lead to result of 1.3464 Plz help (above problem is from padhuka publications Mafa book page No. 6.24) plz help, i did not understood how they have calculated it. 2) further, in ch. Options and futures, on pg no. 10.21 there is theoretical forward price formula as, TFP= S * (e) ^ r * t in this hw to calculate (e) ^ r * t ? PLZ HElp how to calculate above both on the calculator. I am really confused. Thanks in advance.

Replies (6)

Guest

Plz reply.

Ashish M

Chartered Accountant

2731 Points Posted on 22 October 2009

Dear KARAN, its is as simple as that..............

COMPOUNDED ANNUAL GROWTH RATE.

We have to find the annual growth rate for a certain investment i.e. Rs.40 which become Rs.137 after 5 yrs....Here is how to calculate it........

Initial investment (1+r)^5 = total amount

i.e. Rs.40 (1+r)^5 = Rs.137

or , (1+r)^5 = 137 / 40

or , (1+r)^5 = 4.425 [ Here u can alternatively write (1 + r) = (4.425)^1/5 ]

or , Log (1+r)^5 = Log 4.425,

or, 5 Log (1+r) = .6459

or, Log (1+r) = .6459/5

or, Log(1+r) = .1291

or, Antilog (1+r) = antilog .1291

or, (1+r) = 1.346

or, r = 1.346 - 1

or, r = 34.6%

IT IS JUST THAT THE ABOVE FORMULA CONVERGES INTO IN ALL THESE EQUATIONS BUT IT ACTUALLY MADE IT WORSE. U CAN DO IT IN THIS WAY TO SIMPLIFY THINGS..

AS CONCERNED TO UR SECOND QUERY

What is TFP = S * e^r.t

It is another formula for compounding with the exception that when we need to find compunding at continuous rate (just like daily, monthly, quartly, yearly, it is continously without a greater difference of even a day), we use 'e' as a base and the rate of interst and time as its power to find the compounded amount of interest at continuous basis..........

FOR EG. We want to find the amount of Rs.100 compounded continuously at 10% for 2 yrs..

it would be like this..

100 * (e)^.2 (.1*2) = 100 * 1.2214 = 122.14/-

THERE COMES SPECIFIC TABLE FOR SEEING 'E' 's VALUES..

In the table, under 'x' column, see the compunded amt. of r*t i.e in our case above, its .1*2 = .2 and correspondingly see at 'e^x' column for the concerned value i.e. 1.2214 or if u want present value, it is at 'e^-x'.................

I THING ABOVE EXPLANATION WOULD SUFFICE..!!!!!!!!!!!!!!!!

Guest

Thanks a lot Aashish for solving my problem. I was totally confused, from where did the answer came? Further, I am also appearing for november exam. BEST LUCK FOR THE EXAM. Thanks again for giving your time for this.

Ashish M

Chartered Accountant

2731 Points Posted on 23 October 2009

thanks for the recognition.!!!!!!!!!!

Guest

I was just going through the explanation given by Ashish for the first query, since I was also looking into how this was calculated. However even after seeing the above explanation I am having a doubt that how can 1+r)^5 = 137 / 40 become (1+r)^5= 4.425, since 137/40 when solved is 3.425. Is there some additional steps in between that it is 4.425.