INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 16, Problem 25PS
A
Summary Introduction
To calculate: The value of convexity of a ‘bullet’ fixed income portfolio with a single cash flow. Supposing $1000 cash flow paid in 5 years.
Introduction: The bullet fixed bonds are those in which the full payment is received by the investor at the completion of the maturity period. These bonds are non-callable in nature. Investors cannot be redeeming these types of bonds.
B
Summary Introduction
To calculate: The value of convexity of the ‘ladder’ fixed income portfolio.
Introduction: The ladder fixed income portfolios are those portfolios in which each security has a different maturity period of time. Purchasing of multiple smaller bonds instead of one single bond is just to minimize the risk of the portfolio.
C
Summary Introduction
To select: Comparison between ‘ladders’ or ‘bullets’ convexity values.
Introduction : Fixed income portfolio is not redeemed before the maturity period of the portfolio. These are non-callable in nature. Bullet fixed income portfolio has multiple of portfolios with different maturity period.
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You manage a risky portfolio containing 25% of Stock A, 32% of Stock B and 43% of Stock C, respectively, with expected rate of return of 18% and standard deviation of 28%. The Tbill rate is 8%.
Draw the Capital Allocation Line (CAL) of your portfolio on an expected returnstandard deviation diagram. What is the slope of the CAL? Suppose that the client decides to invest in your portfolio a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 16%. Show the position of your client on your fund’s CAL. What is the proportion y? What are your client’s investment proportions in your three stocks and the T-bill fund?
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)?
PLEASE SHOW USING EXCEL
You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 13% with a standard deviation of 25%. You manage an active portfolio with expected return 18% and standard deviation 28%. The risk-free rate is 8%.
1- Draw the CML and your funds’ CAL on an expected return–standard deviation diagram.
2- What is the slope of the CML?
3- Characterize in one short paragraph the advantage of your fund over the passive fund.
4- Your client ponders whether to switch the 70% that is invested in your fund to the passive portfolio. Explain to your client the disadvantage of the switch.
5- Show him the maximum fee you could charge (as a percentage of the investment in your fund, deducted at the end of the year) that would leave him at least as well off investing in your fund as in the passive one. (Hint: The fee will lower the slope of his CAL by reducing the expected…
Chapter 16 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
Ch. 16 - Prob. 1PSCh. 16 - Prob. 2PSCh. 16 - Prob. 3PSCh. 16 - Prob. 4PSCh. 16 - Prob. 5PSCh. 16 - Prob. 6PSCh. 16 - Prob. 7PSCh. 16 - Prob. 8PSCh. 16 - Prob. 9PSCh. 16 - Prob. 10PS
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