Answered: A business declares bankruptcy causing…

A business declares bankruptcy causing it to default on its bond. Investors call this characteristic Question 1 options: credit risk. interest risk. market risk. private risk.

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter14: Investment, The Capital Market, And The Wealth Of Nations

Section: Chapter Questions

Problem 6CQ

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Assume that an economy can have four states: Severe recession, Mild recession, Normal growth, Boom. Probability of each scenario, stock and bond annual returns in that scenario are provided below. Let's also assume that you are creating a portfolio with 65% stocks and 35% bonds. Economy State Severe recession Probability 0.20 Stock Return (%) Bond Return (%) -37 -9 Mild recession 0.30 -11 15 Normal growth 0.40 14 8 Boom 0.10 30 -5 How much is the annual standard deviation of Stock returns? Enter your answer in the following format: 0.1234 Hint: Answer is between 0.1938 and 0.2373
Please both questions
Suppose you have just inherited $10,500 and are considering different options for investing the money to maximize your return. If you are risk-neutral (that is, neither seek out or shy away from risk), which of the following options should you choose to maximize your expected return? A. Hold the money in cash and earn zero return. B. Invest the money in a corporate bond, with a stated return of 4%, but there is a chance of 9% the company could go bankrupt. C. Put the money in an interest-bearing checking account, which earns 3%. The FDIC insures the account against bank failure. D. Loan the money to one of your friends' roommates, Mike, at an agreed upon interest rate of 7%, but you believe there is a 5% chance that Mike will leave town without repaying you.
Assume that the economy can experience high growth, normal growth, or recession. Under these conditions, you expect the following stock market returns for the coming year: Probability State of the Economy High Growth Return 0.2 +30% Normal Growth 0.7 +12% Recession 0.1 -15% a. Compute the expected value of a $1,000 investment over the coming year. If you invest $1,000 today, how much money do you expect to have next year? What is the percentage expected rate of return? Instructions: Enter dollar values rounded to the nearest whole dollar and percentages rounded to one decimal place. The expected value is $ 1129 and the expected rate of return is 12.9 %. b. Compute the standard deviation of the percentage return over the coming year. Standard deviation 11.7 % c. If the risk-free return is 7 percent, what is the risk premium for a stock market investment? Risk premium 17.5 %
Identify the following numbers whether it is a "BOND" or "STOCK"
a) Explain the reason(s) why bond ratings and interest rate spreads on bonds differ. Which measure is considered by many investors to be a more comprehensive measure of risk? Why?
An agent (a financial institution or individual financial investor) that has agreed to deliver a specific asset (as yet unpossessed) to another party at a future date has:A. taken a long position.B. hedged against risk.C. entered a forward transactionD. taken a short positionE. bought an option.
As it captures the sensitivity the price of a financial asset with respect to the fluctuations of the cost of capital, duration can be thought of as a measure of risk, albeit a conditional one. Coherent risk measures should satisfy four conditions, listed on page 260 of your textbook. Show if and how duration satisfies those four conditions
Banks often close Repo-Deals with other banks. Today the lower Rhine-Bank (LRB) owns a 6% CHF-fixed coupon bond which was issued by the Swiss Novartis Group and is subject of a Repo-Deal. Three months ago the bank closed the Repo-Deal which originally had a maturity of six months. 1. Please name the risk which is hedged by Repo Deal. 2. Please name two risks which are related to the above mentioned bond. 3. Select one risk of the above mentioned bond and name one means/financial instrument in order to hedge the selected risk. 4. Briefly describe the events or actions which a. Took place three months ago, b. will take place in three months.
Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment To maximize your expected return, you should choose: Stocks Bonds Probability Return Probability Return 0.15 20% 0.15 16.7% 06 10% T 04 7.5% 0.25 8% 0.45 3.3% OA bonds OB stocks OC. commodities OD. All of the portfolios have the same expected return. If you are risk-averse and had to choose between the stock or the bond investments, you would choose OA the stock portfolio because there is less uncertainty over the outcome OB. the bond portfolio because there is less uncertainty over the outcome. OC. the stock portfolio because of greater expected return. OD. the bond portfolio because of greater expected return. Commodities Probability Return 02 20% 0.2 15% 0.2 8% 02 02 5% 0%
Which of the following represent diversifiable risks? 1. the president of a company suddenly resigns 2. the economy goes into a recessionary period 3. a company's product is recalled for defects 4. the Federal Reserve unexpectedly changes interest rates 1, 2, and 3 only 1, 2, 3, and 4 O 2 and 4 only 1 and 3 only 1, 2, and 4 only
5. Find the expected value assuming the risk factor is 30 % and the interest rate is 12% , if you will receive $20,000 one year from today.