Reference no: EM13880614
Construct a spreadsheet to replicate the analysis of the table. Click here to view the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table:
a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio?
b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?
c. Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio compare to that of the five-asset portfolio? How does it compare if the single-asset portfolio earns a 6 percent annual return?
d. Assume that Asset 1 of the diversified portfolio remains a total loss (–100% return) and asset two earns no return. Make a table showing how sensitive the portfolio returns are to a 1-percentage-point change in the return of each of the other three assets. That is, how is the diversified portfolio’s value affected if the return on asset three is 4 percent or 6 percent? If the return on asset four is 9 percent or 11 percent? If the return on asset five is 11 percent? 13 percent? How does the total portfolio value change if each of the three asset’s returns are one percentage point lower than in the table? If they are one percentage point higher?
e. Using the sensitivity analysis of (c) and (d), explain how the two portfolios differ in their sensitivity to different returns on their assets. What are the implications of this for choosing between a single asset portfolio and a diversified portfolio?
|
Consequence of retiring the debt early
: Smith & Company issued $80 million maturity value of 5-year bonds, which carried a coupon rate of 6% and paid interest semi annually. Calculate the gain or loss that Smith & Company will incur as a consequence of retiring the debt early. Is the ea..
|
|
How many contracts do you buy or sell
: Suppose you want to hedge a $390 million bond portfolio with duration of 8.7 years using 10-year Treasury note futures with duration of 6.6 years, a futures price of 108, and 98 days to expiration. The multiplier on Treasury note futures is $100,000...
|
|
Informational efficiency and efficient markets hypothesis
: Which of the following is not part of the theory of informational efficiency and the efficient markets hypothesis? All information relevant to the values of traded securities can be obtained easily and at low cost. Buyers and sellers do not act ratio..
|
|
Benchmark for determining projects cost of capital
: The corporate cost of capital provides a benchmark for determining a project's cost of capital. In general, projects that are riskier than average must have a cost of capital that is higher than the corporate cost of capital, while projects that are ..
|
|
What happens to the value of the diversified portfolio
: Construct a spreadsheet to replicate the analysis of the table. Click here to view the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different inve..
|
|
With an unfunded pension liability
: With an unfunded pension liability of $581 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 7.4 percent, what is t..
|
|
What is the value of ten percent annual coupon
: What is the value of a 10 percent annual coupon, $1,000 par value bond with 20 years to maturity if the required rate of return on the bond is 12 percent?
|
|
What is the effective annual yield-current yield on the bond
: Bourdon Software has 9.6 percent coupon bonds on the market with 20 years to maturity. The bonds make semi annual payments and currently sell for 107.6 percent of par. What is the current yield on the bonds? What is the effective annual yield?
|
|
Explain the impact on the banks net interest
: Suppose that a bank has $5 billion of one-year loans and $30 billion of five-year loans. These are financed by $25 billion of one-year deposits and $10 billion of five –year deposits. Explain the impact on the bank’s net interest income of interest r..
|