Tutorial 3 Problems

# Tutorial 3 Problems - which it expects will be repaid...

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1 of 2 PROBLEMS for TUTORIAL III Question-1 State Probability Return on Security A Return on Security B Boom 0.3 12% -2% Normal 0.6 8% 2% Bust 0.1 4% 6% Use the information above to answer the following questions: i) What is the expected return on Security A and B? ii) What is the standard deviation of the return on Security A and B? iii) What is the covariance and the correlation between Security A and B? iv) What is the expected return and the standard deviation on a portfolio with weights of 60% in Security A and 40% in Security B? Question-2 Year Return on Security A Return on Security B 2009 -10% 21% 2008 20% 30% 2007 5% 7% 2006 -5% -3% 2005 2% -8% 2004 9% 25% Using the above historical information i) Estimate the expected return on Security A and B. ii) Estimate the variance of the return on Security A and B. iii) Estimate the covariance and the correlation between Security A and B.

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2 of 2 Question-3 Consider two local banks. Bank A has only one loan of \$100 million outstanding,
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Unformatted text preview: which it expects will be repaid today. (If a loan defaults the bank does not get repaid anything for that loan).The loan has a 5% probability of not being repaid. Bank B has 100 loans outstanding each for \$1 million that it also expects will be repaid today. Each loan has a 5% probability of default. The chance of default is independent across all the loans. Calculate the expected payment and the standard deviation of the total repayment for each bank. Question-4 Mary has \$20,000 in her bank account. She plans to borrow an additional \$10,000 from the bank at the risk free rate of 3%. Mary also plans to short-sell \$5,000 worth of Sony stocks and invest all (i.e., \$35,000) in Samsung . Sony ’s expected return is 6% and its volatility (its standard deviation) is 50%. Samsung ’s expected return is 8% and its volatility (its standard deviation) is 40%. The covariance between Sony and Samsung is 18%. Calculate the expected return and the volatility of Mary’s portfolio....
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Tutorial 3 Problems - which it expects will be repaid...

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