Question

please answer the question correct:

Explain fully, with examples, what dollar cost averaging is. What will happen (1) if the price of an investment trends down overtime; (2) trends up; (3) trends down then up; and (4) in real life? Use excel to model and graph the result.

Answer 1

Dollar cost Averaging : It is a strategy in which investor invests fixed amount of dollar at regular period say every month. By this strategy , when price of given asset rises , few number of assets are purchase and when when price of given asset falls more number of assets are purchased.

1) if the price of an investment trends down overtime

Month	Price of share	Fixed amount of dollar	No of shares	Per share costing
1	100	1000	10.00
2	80	1000	12.50
3	60	1000	16.67
4	40	1000	25.00
		4000	64.17	62.34

Thus average costing per share is 62.34$

2)   if the price of an investment trends up

Month	Price of share	Fixed amount of dollar	No of shares	Per share costing
1	100	1000	10.00
2	120	1000	8.33
3	140	1000	7.14
4	160	1000	6.25
		4000	31.73	126.08

Thus average costing per share is 126.08$

3) trends down then up

Month	Price of share	Fixed amount of dollar	No of shares	Per share costing
1	100	1000	10.00
2	80	1000	12.50
3	100	1000	10.00
4	120	1000	8.33
		4000	40.83	97.96

Thus average costing per share is 97.96$

Thus it will profitable