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# Oct 23 note - Should I buy mutual funds.docx

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McMaster University

Economics

ECON 1B03

Hannah Holmes

Fall

Description

Should I buy mutual funds? (Online Chapter)
23/10/2008
Present value calculations
- Future value question: suppose you put $100 in a saving account now and the
interest rate is 4%. How much will you have in 1 year?
o Answer = $104
- After 2 years you would have
o 104 (1.04)
o 100 (1.04) (1.04)
o 100 (1.04) ^2
- Present is the reverse of this process
How much would you have to save now to have $x at some time in the future?
P.V. = X / (1+R) ^n
X= amount received
R = interest rate
N = # of periods
Question: the interest rate is 3% per year. What is the present value of $100 to be
received in 6 months?
- Answer: 100 / (1.03)^.5
- = $98.3
Rule of 70
This give a way to calculate how long something is going to double is they are increasing
at a constant rate of interest
Suppose a variable is growing rate of x% per year.According to the rule if 70 it will take
70/x years for the variable to double
Risk
- Most people are risk averse (they don’t like risk)
- ‘Diversification’= owning several different stocks
- Idiosyncratic risk – uncertainty associated with specific comp

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