Learning Goal: I’m working on a excel spreadsheet and need the explanation and answer to help me learn.
This question explores uncertainty in investing. Assume you plan to invest in a broad-basedequity index. You start with a zero balance account. Each year, you plan to contribute an extra$10,000 at year-end. (Assume annual compounding and uncorrelated market returns from yearto year.)A. If you invest (and contribute) for 30 years and the equity index return each year isnormally distributed with expected return of 10% and standard deviation 20% (i.e., adifferent realized return each year), what is the expected value of your investmentaccount in 30 years (just after your last payment)?B. What is the likelihood that you end up with less than $600,000 in 30 years (i.e., twicewhat you contributed)?C. How does the expected balance and likelihood change if you move your money to cash inyears where the realized index return in the previous year was negative? (Note: You stillmake a contribution to your account every year, but your allocation to the market is zeroin years where the prior year realized market return was negative. At any given point intime, your entire portfolio is either 100% in the market or 100% in cash.)
