Market Master

Stats for Nerds

Underlying Assumptions:

We assume “ceteris paribus” (all else is equal) in any event to ensure relative simplicity. Below are other figures we used for calculations.

Market Risk Premium:

Required Rate of Return:

We assumed that higher-risk investors expect higher returns. Required rates range from 15% to 3% depending on the risk levels of the investment.

Risks:

Companies with differing risk exposure are assigned different beta values (covariance divided by variance of asset returns relative to the benchmark). The beta values employed in our calculations range from 0.5 (least risky) to 2.0 (most risky)

Factors Affecting Stock Performance:

Each investment is tagged with one or more labels (below) that determine which events would affect its performance. The degree of impact directly correlates with its assigned risk values.

#Capital intensive, #Cyclical, #Counter Cyclical, #Raw Material Dependence, #Labor dependent, #Interest sensitive, #Inflation

Calculations:

The exact figures for the simulation are calculated with the formulas below. We use random values to create margins of error for the figures calculated so there is a controlled degree of “luck” in the game that simulates a real stock market.

Interest rate effect on bonds: Modified Duration Formula

\text{Expected Return (ER)} = \frac{\sum_{t=1}^{n} t \times \frac{CF_t}{(1 + YTM)^t}}{\text{Current Bond Price}}

Interest rate effect on stocks: Capital Asset Pricing Model

\text{Modified Duration} = \text{Risk-Free Rate} + \beta \times (\text{Market Return} - \text{Risk-Free Rate})

Inflation effect on bonds: Discounted Cash Flow

P_0 = \frac{C_1}{(1 + \text{ytm})^1} + \frac{C_2}{(1 + \text{ytm})^2} + \ldots + \frac{C_n + \text{Par}}{(1 + \text{ytm})^n}