4 Suppose that the borrowing rate that your client faces is 12% Assume that the equity market index has an expected return of 15% andstandard deviation of 25%. Also essuie that the risk free rate is ry %. Your fund manages a risky portfollo, with the following detailsE(rp) - 15X, op 24x.What is the largest percentage fee that a client who currently is lending (ys 1) will be willing to pay to invest in your fund? What about aclient who is borrowing y> 1? (Negative values should be indicated by a minus sign. Do not round intermediate calculations.Round your answers to 2 decimal places.)y<1

The question is based on the concept of portfolio management and practices. Portfolio Management…

Answered: Suppose that the borrowing rate that…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 5P

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Suppose there is a large probability that L will default on its debt. For the purpose of this example, assume that the value of Ls operations is 4 million (the value of its debt plus equity). Assume also that its debt consists of 1-year, zero coupon bonds with a face value of 2 million. Finally, assume that Ls volatility, , is 0.60 and that the risk-free rate rRF is 6%.
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?
Consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.52 percent and the expected rate of return on the market index fund is 12.68 percent, what is the risk premium on this borrow-and-invest strategy?
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Please explain using Excel and show/explain formulas. Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 8%, and the annual standard deviation is 10%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 index. The index has an expected return of 13%, and its standard deviation is 14%. a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 3%. multiple choice Yes No b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.3. multiple choice Yes No
Suppose that the borrowing rate that your client faces is 9%. Assume that the equity market index has an expected return of 13% and standard deviation of 25%, that rf = 5%. Draw a diagram of your client’s CML, accounting for the higher borrowing rate. Superimpose on it two sets of indifference curves, one for a client who will choose to borrow, and one for a client who will invest in both the index fund and a money market fund.
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.
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