imported>Doug Williamson |
imported>Doug Williamson |
| Line 1: |
Line 1: |
| 1. ''Financial maths.''
| | ''Technical analysis.'' |
|
| |
|
| In maths, compounding effects are the additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.
| | Overshooting is the tendency of markets to overreact to news, good or bad. |
|
| |
|
| | | Therefore the market price would also tend to go up or down by more than is justified by the news. |
| <span style="color:#4B0082">'''Example 1: Compounding for two years at 5% per annum'''</span>
| |
| | |
| Interest quoted at 5% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:
| |
| | |
| = (1.05 x 1.05) - 1
| |
| | |
| = 10.25% for the two year period.
| |
| | |
| | |
| Without the additional interest on interest, the total interest would have been simply
| |
| | |
| 5% per annum x 2 years
| |
| | |
| = 10.00%.
| |
| | |
| | |
| So the compounding effect of interest on interest here
| |
| | |
| = 10.25% - 10.00%
| |
| | |
| = 0.25% over the two year period (= 5% x 5%).
| |
| | |
| | |
| When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.
| |
| | |
| When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects quickly become very much larger.
| |
| | |
| | |
| | |
| <span style="color:#4B0082">'''Example 2: Compounding for two years at 50% per annum'''</span>
| |
| | |
| Sales are growing at 50% per annum, for two years.
| |
| | |
| This means that the total growth after two years is:
| |
| | |
| = (1.50 x 1.50) - 1
| |
| | |
| = 125% for the two year period.
| |
| | |
| | |
| Without the additional growth on growth, the total growth would have been simply
| |
| | |
| 50% per annum x 2 years
| |
| | |
| = 100%.
| |
| | |
| | |
| So the compounding effect of growth on growth here
| |
| | |
| = 125% - 100%
| |
| | |
| = 25% over the two year period (= 50% x 50%).
| |
| | |
| | |
| | |
| <span style="color:#4B0082">'''Example 3: Compounding for 20 years at 5% per annum'''</span>
| |
| | |
| Interest quoted at 5% per annum, compounded annually, for 20 years maturity, means that the interest accumulated after 20 years is:
| |
| | |
| = 1.05<sup>20</sup> - 1
| |
| | |
| = 165% for the 20-year period.
| |
| | |
| | |
| Without the additional interest on interest, the total interest would have been simply
| |
| | |
| 5% per annum x 20 years
| |
| | |
| = 100%.
| |
| | |
| | |
| So the compounding effect of interest on interest here
| |
| | |
| = 165% - 100%
| |
| | |
| = 65% over the 20-year period.
| |
| | |
| | |
| [[File:Compounding effects illustration.png|{850}px|850px]]
| |
| | |
| | |
| 2. ''Risk management.''
| |
| | |
| Additional adverse consequences which occur when multiple adverse conditions arise at the same time.
| |
| | |
| | |
| :<span style="color:#4B0082">'''''Related global risks with compounding effects'''''</span>
| |
| | |
| :"[Global] risks can also interact with each other to form a 'polycrisis' – a cluster of related global risks with compounding effects, such that the overall impact exceeds the sum of each part."
| |
| | |
| :''World Economic Forum (WEF) - Global Risks Report 2023 - p57.''
| |
|
| |
|
|
| |
|
| == See also == | | == See also == |
| * [[Adverse]] | | * [[Market price]] |
| * [[Compound]] | | * [[Technical analysis]] |
| * [[Compound interest]]
| |
| * [[Compounding factor]]
| |
| * [[Consequential risk]]
| |
| * [[Continuously compounded rate of return]]
| |
| * [[Exponential growth]]
| |
| * [[Geometric progression]]
| |
| * [[Global risk]]
| |
| * [[Linear]]
| |
| * [[Polycrisis]]
| |
| * [[Risk management]]
| |
| * [[Simple interest]]
| |
| * [[World Economic Forum]] (WEF)
| |
| | |
| [[Category:Manage_risks]]
| |
