tag:blogger.com,1999:blog-1784375842090766909.post8047501552173615439..comments2023-09-24T03:25:13.523-07:00Comments on Unfair Value: In pursuit of certaintyKamlesh Pandeyhttp://www.blogger.com/profile/01428406137191219341noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-1784375842090766909.post-36471175227135436282008-11-17T22:54:00.000-08:002008-11-17T22:54:00.000-08:00You are not taking into account the effect of comp...You are not taking into account the effect of compounding. <BR/><BR/>years N=50<BR/>returns r=0.2 (20%)<BR/>probability of success p = 0.75 (75%)<BR/><BR/>For a large number N, you will succeed N*p times and fail n*(1-p) times<BR/><BR/>EndingValue = StartingValue * power(1+r,N * p)*power(1-2r,N*(1-p))<BR/><BR/>CAGR(%) = 100 * (power(power(1+r,N * p)*power(1-2r,N*(1-p)),1/N)-1)<BR/><BR/>So expected value does not give indication of the gains. A coin toss with 50% gain on success and 50% loss on failure has expected value zero but its a losing bet if played repeatedly.<BR/><BR/>The reason is <BR/>(1+r)*(1-r) = 1 - r*r<BR/><BR/>If you lose 50% of your investment this year, you won't be able to recover it by making 50% gains next year on the reduced capital.<BR/><BR/>Hope that answers your question.<BR/><BR/>Regards<BR/>KamleshKamlesh Pandeyhttps://www.blogger.com/profile/01428406137191219341noreply@blogger.comtag:blogger.com,1999:blog-1784375842090766909.post-8400063898775883822008-11-17T09:24:00.000-08:002008-11-17T09:24:00.000-08:00As per my calculations, the expected return in cas...As per my calculations, the expected return in case X is -0.6%, in case A is 5%, in case B is 6%, in case C is 8.4% and in case E is 8.7%. What am I doing wrong? (Example: Case A-> 75%*120 + 25%*60 = 105)<BR/><BR/>The rest of the post is strong even with the above calculations but the wrong calculations can bias one's understanding more strongly.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1784375842090766909.post-76572627224120201572008-11-16T18:03:00.000-08:002008-11-16T18:03:00.000-08:00Wow some article. After reading this and the last ...Wow some article. After reading this and the last few articles I am really getting addicted and almost cant wait for the next one, just as i am addicted to Ajit Dayal's (equitymaster) articles. <BR/>The common thing between both of you is you speak truth and are honest. I am yet to come across articles/websites which speak the similar language. Cheers!Anonymousnoreply@blogger.com