Exercise 5-27 AlgoInvestment advisors recommend risk reduction through international diversification. International investing allows you to takeadvantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investmentin either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, whichhas a 24% chance for being good, a 60% chance for being fair, and a 16% chance for being poor. Probability distributions of the returnsfor these markets are given in the accompanying table.State of the U.S. Returns in Returns inEconomyGoodFairPoorEurope10%Asia27%9%-5%10%-9%a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4decimal places and final answers to 2 decimal places.)EuropeAsiaExpected value7.00 %11.04 %Standard deviation5.25 %%b. What will Janice pick as an investment if she is risk neutral?O Investment in EuropeO Investment in Asia

SOLUTION :Let's calculate the expected value and standard deviation for both Europe and Asia.The…

Answered: Exercise 5-27 Algo Investment advisors…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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QUESTION 33 Currently, Zapata Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT? O a. The proposed new project would have more stand-alone risk than the firm's typical project. O b. The proposed new project would increase the firm's corporate risk. O c. The proposed new project would increase the firm's market risk. d. The proposed new project would not affect the firm's risk at all. O e. The proposed new project would have less stand-alone risk than the firm's typical project.
Risk A1 Q3-2i Question 3. Currency Option Pricing with Binomial Model On January 11, the spot exchange rate for the U.S. dollar is $0.70 per Canadian dollar. In one year’s time, the Canadian dollar is expected to appreciate by 20 percent or depreciate by 15 percent. We have a European put option on U.S. dollars expiring in one year, with an exercise price of 1.39 CND$/US$, that is currently selling for a price of $2.93. Each put option gives the holder the right to sell 10,000 U.S. dollars. The current one-year Canadian Treasury Bill rate is 2 percent, while the one-year U.S. Treasury Bill rate is 3 percent, both compounded annually. Treat the Canadian dollar as the domestic currency. 2. i. Calculate the estimated value of this put option for Canadian T-Bill rates of 0%, 1%, 2%, 4%, 5%, and 6%. Plot these values in a graph (by hand or using Excel), with put option values on the y-axis and Canadian T-bill rates on the x-axis.
Which of the following statements is false? A. Basel II use the value at risk (VaR) with a one-year time horizon and a 99.9% confidence level for calculating capital for credit risk and operational risk. B. 20 BP = 0.2% C. Basel I is increasing the amount of capital that banks are required to hold and the proportion of that capital that must be equity. D. Model-building approach is a model for the joint distribution of changes in market variables and using historical data to estimate the model parameters.
8. Macroeconomic factors that influence interest rate levels Apart from risk components, several macroeconomic factors—such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity—influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements True False The larger the federal deficit, other things held constant, the higher are interest rates. When the economy is weakening, the Fed is likely to increase short-term interest rates. During recessions, short-term interest rates decline more sharply than long-term interest rates. The Federal Reserve’s ability to use monetary policy to control economic activity in the United States is limited because US interest rates are highly dependent on interest rates in other parts of the world.
Investment advisors recommend risk reduction through international diversification. International investing allows you to take advantage of the potential for growth in foreign economies, particularly in emerging markets. Janice Wong is considering investment in either Europe or Asia. She has studied these markets and believes that both markets will be influenced by the U.S. economy, which has a 21% chance for being good, a 52% chance for being fair, and a 27% chance for being poor. Probability distributions of the returns for these markets are given in the accompanying table. Return Rates in Europe: Good, 10%; Fair, 4%; Poor, -3% Return Rates in Asia: Good, 24%; Fair, 4%; Poor, -18% a. Find the expected value and the standard deviation of returns in Europe and Asia. (Round intermediate calculations to at least 4 decimal places and final answers to 2 decimal places.)
(a) Suppose that the economy of Microland is expanding rabidly. Due to this rapid expansion, the Federal Reserve Bank is pursuing a contractionary monetary policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. (b) Suppose that the economy of Macroland is expanding rabidly. Due to this rapid expansion, the Federal Government is pursuing a contractionary fiscal policy. Draw clearly labeled graphs for each market (Money market, Goods Market and Investment) to show the effects of this policy on the equilibrium interest rate, investment and output. Is there any crowding-out due to the contractionary fiscal policy?
7 Explain briefly the main characteristics of the Big Mac price index and why it is considered a better predictor of changes in exchange rates than the implied PPP exchange rate. The BigMac currently costs 21.70 yuan in China and $5.71 in the US and the current exchange rate is S(yuan/$)=0.2. a) Would you say the yuan is correctly valued? b) What is the expected evolution of the exchange rate? c) What is the real exchange rate?
G Revisit Choose the best option Duestion 1 • Buying oil producer stocks and selling airtine stocks O Buying US Dollar and selling Euro O Seling ol producer stocks and buying airline stocks O Seling US Dollar and buying Euro Alarge rtinery in tSaudi Arabia is hi by an explosion. Which trade would most likely be pruttatle Clear Response
Identify an economic crisis or turning point that had significant impacts to certain industries in the U.S. market. Explain why investing in international markets can be a good strategy to hedge against this.Why is maintaining a portfolio that contains foreign securities considered a good long-term investment strategy?
QUESTION 24 Due to the political and country risks involved in international business, firms should: O A. do business only in countries where they can guarantee their shareholders profit on every project. OB. attempt to assess, measure, and manage risks before investing abroad. OC. do business only in developed countries. O D. All of the above O E. None of the above

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