Aspiring Actuary: Calculator Skills for Exam MFE

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As I write this article there is just over a month until the next sitting of the Society of Actuaries “Models for Financial Economics” (MFE) Exam. If you plan on writing it this sitting, good luck! If I had one piece of advice it would be to learn how to use your calculator quickly and accurately – I’m going to teach you some tricks that will make some of the seemingly daunting questions straightforward.

What calculator should I be using?

The SOA maintains a list of calculators that one can bring to an official exam. If you’re going to take just one thing away from this article make it that the  TI-30XS MultiView Calculator is the only calculator you will ever need. (Well, possibly the BA II, but that’s for another article). With enough practice and knowledge of the calculator’s unique functions I guarantee you will finish problems much faster than if you had the single view version. Let me convince you why with a couple examples.

Using the Memory Function

Did you just have to convert a nice, round annual effective interest rate to a disgusting, compounded fortnightly, discount rate? Yeah, there’s no way we’ll ever accurately type that number back in. Here is where the “sto->” and “x y z” buttons come in handy. After you hit enter to get your answer, simply hit “sto ->” ,”x”,”enter” and your entry will be saved. You can then recall it in a later function by hitting the “x” button again.

Let’s try this out by converting 6% to it’s semi-annually compound equivalent, saving it, then accumulating $100 today six months forward:

Screen1Screen2Screen3

Easy eh? Best part is, you can store up to seven variables at once which really comes in handy during some of the more lengthy binomial tree questions.

That was boring, my TI-30XIIS can do that too.

All right, I hear you. Let me turn your attention to a specific type of question, this one is #51 in the SOA’s Official MFE practice questions (which if you didn’t know about, today is your lucky day because you just gained an invaluable study resource). Here it is:

question

Now, I’m going to focus on the part of the answer where you need to calculate the sample variance of the given data. I’ll leave the rest of the question as an exercise to the reader (I’ve always wanted to be able to say that).

As someone who is still reading this, you probably know the formula for sample variance is as follows:

S_x = \frac{1}{n-1} \sum_{i=1}^n (x_j - \bar{x})^2

Now, for this question we need the sample variance of the continuously compounded monthly returns. We find those numbers by taking the (natural) logarithm of the price one month over the price the month before, ending up with six values. Here is my chicken scratch version of doing this by hand:

scratch
I really should have opted for the printer with a scanner on boxing day…

Can you imagine doing that during an exam? That’s not even the whole question! Let me show you how to do this much quicker.

The “data” function

See that oddly named “data” button on the second row of the multiview? Click it. You’ll come to this screen:

Screen4

You’ll learn to love this screen. Enter the values that we want to find the variance of one by one, pressing enter after each on. Note – I’m entering these as “ln(56/54) -> enter -> ln(48/56) -> enter …”. The calculator does the necessary calculation automatically!

Screen5

Now, hit “2nd -> quit”. Your numbers will be saved. Now we’re ready to see some magic: hit “2nd -> data(stat)”. This brings us to the STATS screen. Since we are only dealing with line one, hit “1: 1-Var Stats”, “Data: L1”, “FRQ: ONE”. Hit CALC.

Screen6Screen7Screen8

This screen shows a list of different statistics that the calculator has calculated for you. We can see the first number, n, is our number of entries, x bar is our average, and Sx is our sample standard deviation! Scroll down to Sx, press enter, and it will show up as a variable in the calculation screen. Remember, variance is standard deviation squared, so square this number:

Screen9

Look familiar? That was much quicker than doing it by hand, and there is a much lower chance that you’ll mistype something when using your calculator. Using this method can really make a difference when it comes to these tedious calculations.

You probably noticed that there is more the the data screen than what we used. In a future article I’ll be looking at some methods for using the TI-30XS Multiview for Exam C, so look out for it!

-R

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