ABC Bank has two loans of $20,000 each, with the following characteristics: Loan A has an expected return of 10 percent and a standard deviation of returns of 10 percent. The expected return and standard deviation of returns for loan B are 12 percent and 20 percent, respectively. What is the expected return of this portfolio?

ABC Bank has two loans of $20,000 each, with the following characteristics: Loan A has an expected return of 10 percent and a standard deviation of returns of 10 percent. The expected return and standard deviation of returns for loan B are 12 percent and 20 percent, respectively. What is the expected return of this portfolio?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 13P

See similar textbooks

Similar questions

The Bank of Tinytown has two $20,000 loans that have the following characteristics: Loan A has an expected return of 10 percent and a standard deviation of returns of 10 percent. The expected return and standard deviation of returns for loan B are 12 percent and 20 percent, respectively. A. If the correlation coefficient between loans A and B is .15, what are the expected return and standard deviation of this portfolio? B. What is the standard deviation of the portfolio if the correlation is -.15?
Suppose that an FI holds two loans with the following characteristics. Annual Spread Between Loss to FI Expected Loan Rate and FI=s Annual Given Default Loan Xi Cost of Funds Fees Default Frequency 1 .6 4.5% 2.5% 30% 3% ρ12 = -.4 2 .4 3.5% 2% 20% 5% Calculate of the return and risk on the two-asset portfolio using KMV Portfolio Manager.
Consider a position consisting of a K200,000 investment in Asset A and a K300,000 investment in Asset B. Assume that the daily volatilities of the assets are 1.5% and 1.8% respectively, and that the coefficient of correlation between their returns is 0.4. What is the five day 95% Value at Risk (VaR) for the portfolio (95% confidence level represents 1.65 standard deviations on the left side of a normal distribution)?
You are constructing a portfolio of two assets, Asset A and Asset B. The expected returns of the assets are 12 percent and 15 percent, respectively. The standard deviations of the assets are 29 percent and 48 percent, respectively. The correlation between the two assets is .25 and the risk-free rate is 5 percent. What is the optimal Sharpe ratio in a portfolio of the two assets? What is the smallest expected loss for this portfolio over the coming year with a probability of 2.5 percent?
An invester has up to $250,000 to inveest in three types of investments. Type A pays 8% annually and has a risk factor of 0. Tupe B pays 10% annually and has a risk factor of 0.06. Type C pays 14% annually and has a risk factor of 0.10. to have a well-balanced potfolio, the investor imposes the following conditions. The average risk factor should be no greater than 0.05. Moreover, at least one-fourth of the total portfolio is to be allocated to type A investments ans at least one-fourth of the portfolio to be allocated to type B investments. How much should be allocated to each type of investment to obtain a maximum return? Use simplex method to solve this.
Security F has an expected return of 10 percent and a standard deviation of 43 percent per year. Security G has an expected return of 15 percent and a standard deviation of 62 percent per year. Required: (a) What is the expected return on a portfolio composed of 30 percent of Security F and 70 percent of Security G? (b) If the correlation between the returns of Security F and Security G is .25, what is the standard deviation of the portfolio described in part (a)?
A hedge fund charges a management fee of 3 percent and an incentive fee of 25 percent for all returns over a benchmark return of 4%. The risk-free rate is 2% and the standard deviation of the funds continuously compounded returns has been 23%. The current net asset value is $55 per share. What is the value of all fees expressed as a percent at the start of the investment period?
Suppose you have $2,000 to invest. The market portfolio has an expected return of 10.5 percent and a standard deviation of 16 percent. The risk-free rate is 3.75 percent. How much should you invest in the risk-free asset if you wish to have a 15 percent return on the portfolio?
There are two risky assets, debt and equity. The expected return is 8% on the debt and 13% on the equity. The standard deviation is 12% for the debt and 20% for the equity. The correlation coefficient between the debt return and the equity return is 30%. a. If an investor invest 40% of her money in the debt and 60% in the equity, what is the expected return and the standard deviation on her portfolio? b. The risk-free rate is 4%. What are the weights of the debt and equity in the optimal portfolio? A. 50.8% B. 48.7% C. 40.4% D. 30.6%
You estimate that the expected return of the portfolio is 8% and that the standard deviation is 15%. If you had invested 1 million in the portfolio, what is the size of a large loss as measured by the VaR? A) -20.00% B) -16.75% C) -17.25% D) -16.31%
Assume the riskless rate of interest is 2% per year, and the expected rate of return on the market portfolio is 8% per year. According to the CAPM, what is the efficient way for an investor to achieve an expected rate of return of 5% per year? If the standard deviation of the rate of return on the market portfolio is 4%, what is the standard deviation of the portfolio producing the 5% expected return? • Plot the CML and locate the foregoing portfolios on the same graph. • Plot the SML and locate the foregoing portfolios on the same graph.
Equity has a beta of 1.35 and an expected return of 16 percent. A risk-free asset currently earns 4.8 percent. (a) What is the expected return on a portfolio that is equally invested in the two assets? (b) If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights? (c) If a portfolio of the two assets has an expected return of 8 percent, what is its beta? (d) If a portfolio of the two assets has a beta of 2.70, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain