To specialists in the theory of probability. I have a portfolio of 10 stocks. What is the probability that 2 of my 10 companies will go bankrupt next year? - page 8
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No, the events are independent.
Man, how can I make it clearer...it's like radioactive decay - you have 10 atoms of the rare "Nuinahcium", which is known to decay 50 out of 5000 atoms in a year.
Different models. Yours assumes self-decay of atoms, mine assumes they are shot off from the outside. The events are still independent, but it's the ones that have to hit, not the 50,000 neighbours.
Let's not get ahead of ourselves - let's leave the task to the abstract.
It's not interesting, from the word "at all".
The events are independent.
And this assumption is a bit far-fetched. Especially given the subject matter (companies, stocks, investments).
For some reason the topikstarter didn't ask about Nuinahtions, but about a stock portfolio?
Or am I the only one not interested in dabbling with the theorist?
Different models. Yours assumes the self-decay of the atoms, mine assumes they are shot from the outside. The events are still independent, but it's the ones that have to hit, not the 50,000 neighbours.
The problem is that they adapt the model to the conditions of the problem to which it is convenient to apply. And solve what they think they know.
Do the math - a vector of 50,000 companies, choose 10 random ones in it and shoot 50. How many of the 10 selected are not shot ?
The problem is that they adapt the model to the conditions of the problem. And they solve what they think they know.
calculate - a vector of 50,000 companies, select 10 random companies in it and shoot 50. How many of the 10 selected are not shot ?
-40
The portfolio will lose 10% of its capital. But the other 9 companies will give 9% profit for that year. The result for the year would be -1%.
We have to calculate the expectation of profit per share. Assuming your assumptions, it turns out to be slightly negative - with probability 0.01 profit is equal to -100% and with probability 0.99 = 1-0.01 it is equal to +1%. So we get M = (-100%)*0.01+(1%)*0.99 = -0.01%. Obviously, expectation of return of any portfolio will be the same.
We have to calculate the expectation of profit per share. Assuming your assumptions, it turns out to be slightly negative - with probability 0.01 profit is equal to -100% and with probability 0.99 = 1-0.01 it is equal to +1%. So we get M = (-100%)*0.01+(1%)*0.99 = -0.01%. Obviously, expected payoff for any portfolio will be the same.
A bit of a mix-up. -1% in one particular year, more plus in others.
And in general, as I said, there are company-specific valuation methodologies. This bullshit is probably handled by funds when making portfolios. If you find it, it will be more real.
igrok333, you can take a ready portfolio with capital protection so you don't bother. Or is it much less profitable? Have you done the math?
A bit of a mix-up. -1% in one particular year, more plus in the others.
And in general, as I said, there are company-specific valuation methodologies. The funds probably do this shit when making portfolios. If you find it, it will be more real.
igrok333, you can take a ready portfolio with capital protection so you don't bother. Or is it much less profitable? Have you done the math?
What is -1%?
What is -1%?
I have not corrected my post correctly. I wanted to say - if the company gives 1% annual growth in value, then what the hell is the need for it?)
You are correct, for a 1% p.a. MO is technically negative if you don't include reinvestment and dividends, but then you also have to take inflation into account.
If a company gives a 1% annual increase in value, then what's the point?)
It's hard to disagree with that)
for 1% p.a. MO is technically negative if you don't include reinvestment and dividends, but then you have to take inflation into account as well.
I'm well aware that the model I used is quite primitive, but it's the standard way to go for a "zero-sum approximation".
In addition (as Maxim Kuznetsov wrote above), it is not necessary to make up the problem conditions.
Last year 50 out of 5,000 companies went bankrupt in the US market. So the probability of a company going bankrupt is 1/100.
I have a portfolio of 10 stocks.
What is the probability that 1 of my 10 companies will go bankrupt in a year? It's easy to calculate.
The probability of one company going bankrupt is 1/100. And we take 10 companies, so we increase the odds of the event occurring by a factor of 10.
So the probability is 1/100 * 10 = 1/10.
What is the probability that 2 of my 10 companies will go bankrupt in one year? How do you calculate this?
it is not the probability here, but the trend.
The strength of the upward/downward trend is determined
and then any kind of logic, up to and including probabilities.
;)