Fund 1 2 3 (average Corporate duration of (average 4.5 years) duration= 5.5 years) 45% 25 70 40% 60 20 (average duration= 2.3 years) 15. 25 10 Simon expects the economic conditions to improve, where the yield curve becomes steeper (the spread between long term and short term yield increases) a) Based on Simon's expectation of how the yield curve would change, explain how would government and Investment grade bonds expected to perform? 5) Based on Simon's expectation of the economy, explain how would high yield (below Investment grade) bonds expected to perform? :) Based on your answers to part a and part b, explain which Fund hould Simon invest in to generate the highest return. Feel free to use umerical example to demonstrate your answer.
Fund 1 2 3 (average Corporate duration of (average 4.5 years) duration= 5.5 years) 45% 25 70 40% 60 20 (average duration= 2.3 years) 15. 25 10 Simon expects the economic conditions to improve, where the yield curve becomes steeper (the spread between long term and short term yield increases) a) Based on Simon's expectation of how the yield curve would change, explain how would government and Investment grade bonds expected to perform? 5) Based on Simon's expectation of the economy, explain how would high yield (below Investment grade) bonds expected to perform? :) Based on your answers to part a and part b, explain which Fund hould Simon invest in to generate the highest return. Feel free to use umerical example to demonstrate your answer.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Concept explainers
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.
Question
Asap plzzz
Transcribed Image Text:Simon needs to select a fixed income security fund (from a selection of
three funds presented below) to take advantage of the forecasted
economic conditions and the yield curve changes. Current yield curve is
almost a flat yield curve (short term = 2.6%, mid term- 3.0% and long term
= 3.2%)
Question 8
Allocation for the three sectors of the fixed income market in each fund is
provided below:
Fund
1
2
3
Government
(average
duration of
4.5 years)
45%
25
70
Investment
Grade
Corporate
(average
duration=
5.5 years)
40%
60
20
High Yield
(average
duration=
2.3 years)
15
25
10
improve where the yield curve
Transcribed Image Text:Term
me
kit
ch
Fund
1
2
3
(average
duration of
4.5 years)
45%
25
70
Corporate
(average
duration=
5.5 years)
40%
60
20
(average
duration=
2.3 years)
15.
25
10
Simon expects the economic conditions to improve, where the yield curve
becomes steeper (the spread between long term and short term yield
increases)
a)
4 Based on Simon's expectation of how the yield curve would
change, explain how would government and Investment grade bonds
expected to perform?
b)
Based on Simon's expectation of the economy, explain how
would high yield (below Investment grade) bonds expected to perform?
c)
Based on your answers to part a and part b, explain which Fund
should Simon invest in to generate the highest return. Feel free to use
numerical example to demonstrate your answer.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education