Let it denote the effective annual return achieved on an equityfund achieved between time (t-1) and time t.Annual log-returns on the fund, denoted by In(1+i̟²), areassumed to form a series of independent and identicallydistributed Normal random variables with parameters µ = 7%and σ = 10%.An investor has a liability of £20,000 payable at time 10.Calculate the amount of money that should be invested now sothat the probability that the investor will be unable to meet theliability as it falls due is only 5%.Express your answer to the NEAREST INTEGER and do NOTinclude a "£" sign.Note: From standard Normal tables, we have (-1.645) = 0.05.

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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 10P

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State the return rate (in %) for your optimal portfolio.
A particular firm’s portfolio is composed of two assets, which we will call" A" and "B." Let X denote the annual rate of return from asset A, and let Y denote the annual rate of return from asset B. Suppose that E(X) = 0.15, E(Y) = 0.20, SD (X) = 0.05, SD (Y) = 0.06, and CORR (X, Y) = 0.30. Use a spreadsheet to perform the following analysis. (a) What is the expected return of investing 50% of the portfolio in asset A and 50% of the portfolio in asset B? What is the variance of this return? (b) Replace CORR (X, Y) = 0.30 by CORR (X, Y) = 0.60, 0, -0.30, and -0.60 and answer the questions in part (a). What is the impact of correlation on the expected returns and its variance? Explain why this is so. (c) Suppose that the fraction of the portfolio that is invested in asset B is f, and so the fraction of the portfolio that is invested in asset A is (1 – f). Let f vary from f = 0.0 to f = 1.0 in increments of 5% (that is, f = 0.0, 0.05, 0.10, 0.15, ...), and compute the mean and the…
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Suppose an investment is equally likely to have a 24% return, or a - 8% return, or a 6% return. The expected return of this investment is%. [Please answer with two decimal places ]
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