QARM ASSIGNMENT NO -2

Submitted by:
Kanak
Roll No. (35139)
Section B
IRMA

2

1. GIEVN DATA ACCORDING TO THE ROLL NUMBER

Being an Investor one need to get into market trends. After researching the markets over last
few years five possible scenarios for national economy are:
1. Rapid Expansion,
2. Moderate Expansion,
3. No Growth,
4. Moderate Contraction, And
5. Serious Contraction.
Below is the given data with probability distribution and market return for each of these 5
scenarios.
We are going to use simulation model to know what is the most likely scenario to occur with
the help of given probability and market return with each scenario.

A simulation model is same as random spreadsheet model except that some cells include
random quantities. It is an useful tool to incorporate uncertainty explicitly into spreadsheet
model. Excel recalculates many times and helps in discovering which is the most likely to
occur, best case and the worst case results.
Or Goal here is to simulate many returns for random variables( distributed between 0 to 1) in
short run( 50 data entries) and Long run (5000 and 50,000 entries) from the given probability
distribution and analyze the resulting returns.
2. CALCULATION OF MEAN, VARIANCE AND STANDARD
DEVIATION FROM RETURN

Mean of return 13.88%
Variance from return 0.005396213
standard deviation from
return 0.372598578

Mean, variance and standard deviation from return/gain are important indicators for deciding
if our expected outcome by simluation (in short run or long run) is profitable or not.
Economic outcome Probability Market return
Rapid Expansion 0.13 29.80%
Moderate Expansion 0.26 16.04%
No Growth 0.26 13.83%
Moderate Contraction 0.25 6.99%
Serious Contraction 0.10 4.97%
3

3. CUMULATIVE PROBABILITY SCALE
For comparison of outputs from short run to long run random probabilities (50, 5000, 50,000
samples) with the initial reference table, another table with cumulative probability range & its
outputs is compiled:

Cumulative range Market return Economic Outcome
0 29.80% Rapid Expansion
0.13 16.04% Moderate Expansion
0.39 13.83% No Growth
0.65 6.99% Moderate Contraction
0.9 4.97% Serious Contraction

4. MEAN OF RETURN




Mean from Return 13.88%
Short Range Mean (50
Entries) 13.69%
Long Range Mean(5000
Entries) 13.88%
Long Range Mean(50000
Entries) 13.88%
Fig 1: Graph Representing Mean of return for Short term and long Term

1.Short Run(50 entries): From the graph of mean of return we can observe that for short range simulation (
50 entries) the difference between actual mean and expected mean is significant, that is 13.69% is our
mean from short run and our actual mean is 13.88%
2. Long Run ( 5000 entries): From the graph of mean of return we can observe that for long range
simulation ( 5000 entries) there is no difference between actual mean and expected mean . Both are at the
same value that is 13.88%.
2. Long Run ( 50,000 entries): From the graph of mean of return we can observe that for long range
simulation ( 50000 entries) there is no difference between actual mean and expected mean . Both are at the
same value that is 13.88%.
Conclusion:
As we go from short-term simulation to long-term simulation we tend to reach our actual or desired data
value. Probability to achieve desired result is increases in long-run.
5. STANDARD DEVIATION FROM RETURN

Standard Deviation from
Return 0.073459
Standard Deviation from
Return in Short Run (50
Entries) 0.071058
Standard Deviation from
Return in Long Run(5000
Entries) 0.073402
Standard Deviation from
Return in Long Run(50000
Entries) 0.073304














Fig 2: Graph Representing Standard deviation from return for Short term and long Term
5


1.Short Run(50 entries): From the graph of Standard deviation from return we can observe that for short
range simulation ( 50 entries) the difference between actual stand deviation and expected is significant,
that is 0.071058 is our mean from short run and our actual standard deviation is .073458.
2. Long Run ( 5000 entries): From the graph of Standard deviation from return we can observe that for
long range simulation ( 5000 entries) there is a very small difference between actual standard deviation
and expected standard deviation .
2. Long Run ( 50,000 entries): From the graph of Standard deviation from return we can observe that for
long range simulation ( 50000 entries) again there is a small difference between actualactual standard
deviation and expected standard deviation .
Conclusion:
As we go from short-term simulation to long-term simulation we tend to reach our actual or desired data
value. Probability to achieve desired result is increases in long-run.