A major requirement in managing a fixed-income portfolio using a contingent immunization policy is monitoring the relationship between the current market value of the portfolio and the required value of the floor portfolio. This difference is defined as the margin of error. In this regard, assume a $300 million portfolio with a time horizon of six years. The available market rate at the initiation of the portfolio is 12%, but the client is willing to accept 10% as a floor rate to allow use of active management strategies. The current market values and current market rates at the end of Years 1, 2, and 3 are as follows: End of Year Market Value ($ Mil) Market Yeild 1 $334.9 10 % 2 399.5 9 3 401.2 11 Assume that semiannual compounding is used. Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answers to two decimal places. Calculate the required ending-wealth value for this portfolio. $ million Calculate the required ending-wealth value for this portfolio at the end of Years 1, 2, and 3. End of Year 1: $ million End of Year 2: $ million End of Year 3: $ million Compute the margin of error at the end of Years 1, 2, and 3. End of Year 1: $ million End of Year 2: $ million End of Year 3: $ million
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
A major requirement in managing a fixed-income portfolio using a contingent immunization policy is monitoring the relationship between the current market value of the portfolio and the required value of the floor portfolio. This difference is defined as the margin of error. In this regard, assume a $300 million portfolio with a time horizon of six years. The available market rate at the initiation of the portfolio is 12%, but the client is willing to accept 10% as a floor rate to allow use of active management strategies. The current market values and current market rates at the end of Years 1, 2, and 3 are as follows:
| End of Year | Market Value ($ Mil) | Market Yeild | |
| 1 | $334.9 | 10 | % |
| 2 | 399.5 | 9 | |
| 3 | 401.2 | 11 |
Assume that semiannual compounding is used. Do not round intermediate calculations. Enter your answers in millions. For example, an answer of $1.20 million should be entered as 1.20, not 1,200,000. Round your answers to two decimal places.
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Calculate the required ending-wealth value for this portfolio.
$ million
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Calculate the required ending-wealth value for this portfolio at the end of Years 1, 2, and 3.
End of Year 1: $ million
End of Year 2: $ million
End of Year 3: $ million
-
Compute the margin of error at the end of Years 1, 2, and 3.
End of Year 1: $ million
End of Year 2: $ million
End of Year 3: $ million
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