**PART 1**

FYI – YOU CAN USE EXCEL AND OR ANY OTHER SOFTWARE AS RANDOM NUMBER GENERATOR FOR THE NUMERICAL SIMULATION

Financial Planning Case Study HW.pdf

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a) Recreate tables 7.4, 7.5, 7.6, 7.7, and 7.8 in the spreadsheet below:

Financial Planning Assignment 2023.xlsx Download Financial Planning Assignment 2023.xlsx

I started 7.4 for you; you just need to complete it, then add all other tables to the right of table 7.4 **on the “Main Page” tab**. Use **formulas **to make calculations, i.e., do not hard code values into the cells.

**b) SIMULATE THE PROBABILITY OF HENRY RUNNING OUT OF MONEY BY THE TIME HE IS 95**

Assuming a normal distribution for each of the annual returns, and the assumptions provided in the spreadsheet in cells E3 and E4 on the **Simulation Page** tab, what is the probability that Henry will run out of money by the time he is 95? (i.e. ending balance after 30 years is negative). Create a new sheet by duplicating the **Simulation Page” tab and call it Simulations.** Simulate on this tab 1000 instances an calculate the probability of Henry running out of money by 95. **Also, type in your answer on the Tab labelled “ANSWERS TO Parts b through g”.**

c) Henry realizes that the probability of running out of money in strategy b) above is too high. He would prefer to have a strategy so that he has a 97% probability of not running out of money at age 95 – so only a 3% probability of a negative balance at age 95. So he decides maybe he should withdraw less than his original plan of $60,000 ( 3% inflation increase every year) per year. How much should Henry withdraw in year 1 (and still increase this amount every year per the 3% inflation assumption) so that he only has at most a 3% chance of having a negative ending balance after 30 years? Note – round to the nearest $1,000 such that the probability of the ending balance equaling 0 is at most 3%.

**PART 2**

The second part of the homework will have you repeat VaR and Economic Capital, models. Use the return time series?? from last time (Amazon & Apple daily returns). Calculate for a portfolio that consists of USD 1,000,000.00 invested in 30% Apple and 70% Amazon the following:

- Daily VaR [in USD]
- Analytical Calc
- Theoretical VaR for (50%, 80, 90, 95,99, 99.9, 99.999, 99.9999, 99.99999999)
- Number of theoretical losses that we??d expect to exceed the theoretical VaR
- Number of actual losses exceeding the theoretical VaR

- Numerical Calc
- Historical VaR for (50%, 80, 90, 95,99, 99.9, 99.999, 99.9999, 99.99999999)
- Number of theoretical losses exceeding the historical VaR

- Discuss the results with a couple of sentences

- Analytical Calc
- Economic Capital [in USD]
- A theoretical firm has the following balance:
- Assets: 1mn, 30% Apple & 70% Amazon
- Liabilities: 1mn, X% Equity, 1-X% Liabilities

- Calculate the economic capital
- 10-Day VaR, 99.99%

- Identify and discuss your model??s assumptions and limitations

- A theoretical firm has the following balance:

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