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
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- Assume you can invest in 2 projects whose payoff depend on the state of the economy. The profits from each project for each state of the economy are presented below. What are the expected payoffs of each project if there is a 50% chance of a recession and a 50% of no recession? Profit under recession Profit under normal conditions Project 1100,000 150,000 Project 2 50,000 240,000 O Project 1: $120,000 and Project 2: $150,000 Project 1: $125,000 and Project 2: $115,000 Project 1: $145,000 and Project 2: $145,000 O Project 1: $125,000 and Project 2: $145,0005. 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.8. Risk and return Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds. Combination A BUDW C E Fraction of Portfolio in Diversified Stocks (Percent) 0 25 50 75 100 Average Annual Return (Percent) 3.50 7.50 11.50 15.50 19.50 Standard Deviation of Portfolio Return (Risk) (Percent) 0 5 10 Sell some of her stocks and place the proceeds in a savings account O Sell some of her bonds and use the proceeds to purchase stocks Accept more risk Sell some of her stocks and use the proceeds to purchase bonds 15 20 As the risk of Caroline's portfolio increases, the average annual return on her portfolio Suppose Caroline currently allocates 25% of her portfolio to a diversified group of stocks and 75% of her portfolio to risk-free bonds; that is, she chooses combination B. She wants to increase the…
- **Practice** I have been trying to practcie this question but I always seem to get it wrong What is the expected final wealth of each agent? Pay attention to the names in each option!A. Anna’s expected final wealth is 1440 and Bob’s expected final wealth is 980B. Anna’s expected final wealth is 1020 and Bob’s expected final wealth is 1380C. Anna’s expected final wealth is 1460 and Bob’s expected final wealth is 1105D. Anna’s expected final wealth is 1140 and Bob’s expected final wealth is 1200E. None of the options aboveSuppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds.CombinationFraction of Portfolio in Diversified StocksAverage Annual ReturnStandard Deviation of Portfolio Return (Risk)(Percent)(Percent)(Percent)A 0 1.50 0B 25 3.00 5C 50 4.50 10D 75 6.00 15E 100 7.50 20There is a relationship between the risk of Caroline's portfolio and its average annual return.Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase…1. Which of the following is INCORRECT? a All of a stock's risk could be unsystematic. b. A negative beta stock has an expected return less than the risk-free rate. c. Anticipated returns on any given stock are always greater than 0. d. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). 2. Which of the following measures the total risk of a portfolio? a. Beta b. Standard Deviation c. Correlation Coefficient d. Alpha 3. Which of the following stocks have the highest systematic risk? a A stock with high correlation to the market and high returm volatility. b. A stock with low correlation to the market and a high return volatility. c A stock with high correlation to the market and a low return volatility. d. A stock with low correlation to the market and a low return volatility. 4. Which of the following companics have the lowest systematic risk? a A company that sells soups (Campbells), beta=0.60 b. A coffee company…
- Problem 2 Suppose a firm needs $100 to invest in a project. The firm can choose between two projects: S (safe) or R (risky). The bank cannot directly control the choice of project. If it is S, then it will yield a cash flow of $300 with probability 0.8 and zero with probability 0.2. If it is R., the project will yield a cash flow of $423 with probability 0.5 and zero with probability 0.5. Everybody is risk neutral. The riskless interest rate is 20%. The bank would like to induce the choice of project S. Assume that collateral worth $1 to the firm is worth $0.9 to the bank. The banking sector is perfectly competitive. a. Demonstrate that when the bank offers an unsecured loan, project S will never be chosen. b. Calculate the interest rate when the bank offers an unsecured loan. c. What kind of secured contract would the bank offer to induce the choice of project S? d. Calculate the collateral and interest rate associated with this secured contract.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.1. Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A) $531.40 later today, since $1 today is worth more than $1 in one year. B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. C) Neither - both investments have a negative NPV. D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.
- 4) You are a financial professional working in a corporate loan department. A company named Mitch Hedberg Inc. (MH) comes to you for a loan. MH has debt from a previous loan (given by a different firm than yours) of 200. Your company analysts say that MH is likely to earn either 180, 240, or 300 this year - each with a probability of 1/3. MH wants you to lend them 100. MH could use this borrowed 100 to do either project X or project Y. Project X has a guaranteed return of 125 if the 100 is put there. Project Y may return either 0 or 210; each has probability of 1/2 and also costs 100 to do. a) Which project, X or Y, has the larger expected value? b) If you lend MH the 100, what will they do with the money? Why? Show your math. c) Should you lend MH the money or not? Show your math. d) Why did I choose the letters "MH" for this problem? What financial economic concept with initials "MH" is important in this problem?2. The Ragged Mountain Running Shop (RMRS) sells running shoes and apparel in Charlottesville, VA. The owners of RMRS are considering the possibility of opening new retail locations. After careful market analysis, they estimate the expected returns at five new potential locations. These estimates are listed in the following table, along with the amount RMRS would need to borrow in order to open each location. Qty. of funds demanded $100,000 $100,000 Location Exp. Return Crozen Downtown Charlottesville 6% 4% Harrisonburg Waynesboro West End of Richmond 11% $80,000 $60,000 $200,000 2% 8% RMRS approaches the Virginia National Bank (VNB) with hopes of borrowing to expand into other locations. Which locations will RMRS open if VNB offers them a loan at an interest rate of 7%? What locations will it open if VNB offers them a loan at an interest a. rate of 5%? b. What is the total amount of loans that RMRS takes at an hterest rate of 7%? At an interest rate of 5%? c. Use the information in…Please explain in detail about expected utility to get a positive upvote. An individual has a utility function U = W¼, where W is her total wealth. She has one safe asset worth Rs 5,000, and another risky asset whose value can be either Rs 5,000 or Rs 1,400 with equal probabilities. What is her expected utility? (a) Rs 11,400 (b) Rs 100 aw lo boeoqmoo vmonoos to on g cubire cou s o iva alagos ad a adWnooni lanou lo OAuti (c) Rs 2,580 (d) Rs 90