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- What is compute forward-looking expected return and risk and how does it influence financial decisions regarding risk and return?Submit All Question 28 of 30 Suppose Jon decides to purchase either a long-term Treasury bond or a share of stock from a company in the Dow Jones Industrial Average. Assume that either one will behave similarly to the average security in their class, and ignore the effect of market conditions. Which security is more likely to lose most of its value in the next year after Jon purchases it? O the probabilities of major loss are the same they are both guaranteed to increase in value the stock the bond Based on historical returns, which security is likely to grow more significantly in value after Jon purchases it? the bond 8:27 PM a 46°F E 4) 12/15/202A risk-averse investor will: Answer a. Always accept a greater risk with a greater expected return b. Only invest in assets providing certain returns c. Sometimes accept a lower expected return if it means less ri d. Never accept lower risk if it means accepting a lower expected return
- A risk-averse investor will: a. Always accept a greater risk with a greater expected return b. Only invest in assets providing certain returns c. Sometimes accept a lower expected return if it means less ri d. Never accept lower risk if it means accepting a lower expected returnProblem 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.D&R A3 6-3 Question 6. VAR Calculation A firm has a portfolio composed of stock A and B with normally distributed returns. Stock A has an annual expected return of 15% and annual volatility of 20%. The firm has a position of $100 million in stock A. Stock B has an annual expected return of 25% and an annual volatility of 30% as well. The firm has a position of $50 million in stock B. The correlation coefficient between the returns of these two stocks is 0.3. If the firm sells $10 million of stock A and buys $10 million of stock B, by how much does the 5% annual VAR change?
- Define the term Expected return on a risky asset?3b. By investing in a particular stock, Mullins can in one year make a profit of $5000 with a probability 0.4 or lose $5000 with probability of 0.6. What is Mullins expected gain?D&R A3 6-1 Question 6. VAR Calculation A firm has a portfolio composed of stock A and B with normally distributed returns. Stock A has an annual expected return of 15% and annual volatility of 20%. The firm has a position of $100 million in stock A. Stock B has an annual expected return of 25% and an annual volatility of 30% as well. The firm has a position of $50 million in stock B. The correlation coefficient between the returns of these two stocks is 0.3. What is the 5% daily VAR for the portfolio? Assume 365 days per year.
- D&R A3 6-1 Question 6. VAR Calculation A firm has a portfolio composed of stock A and B with normally distributed returns. Stock A has an annual expected return of 15% and annual volatility of 20%. The firm has a position of $100 million in stock A. Stock B has an annual expected return of 25% and an annual volatility of 30% as well. The firm has a position of $50 million in stock B. The correlation coefficient between the returns of these two stocks is 0.3. Compute the 5% annual VAR for the portfolio. Interpret the resulting VAR.Suppose that you are asked to forecast future stock prices for Tesla, so you proceed tocollect all available information. The day you announce your forecast, Toyota announce abrand-new plan to merge and reshape the structure of the electric carts industry. Wouldyour forecast still be considered optimal? Discuss.What will happen if two assets are earning the same expected return, but one is riskier than the other?