Category: Finance

Which security should an investor choose if she wants to maximize expected returns,minimize risk

Principals of Investments
Problem Set 2

1. The expected returns and standard deviation of returns for two securities are as follows:
Security Z
Security Y

Expected Return
15%
35%

Standard Deviation
20%
40%

The correlation between the returns is +0.25.
(a)Calculate the expected return and standard deviation for the following portfolios:
1.All in Z
2.0.75 in Z and .25 in Y
3.0.5 in Z and .5 in Y
4.0.25 in Z and .75 in Y
5.All in Y
(b)Draw the mean-standard deviation frontier.
(c)Which portfolios might be held by an investor who likes high mean and low standard deviation? (In other words, which portfolios are on the efficient frontier?)
2.Here are some characteristics of two securities:
Security 1: ?(?1) = 0.1 ?2(?1) = 0.0025
Security 2: ?(?2) = 0.16 ?2(?2) = 0.0064

Answer the following questions:
a.Which security should an investor choose if she wants to (i) maximize expected returns, (ii) minimize risk (assume the investor cannot form a portfolio)?
b.Suppose the correlation of returns on the two securities is +1.0, what is the optimal combination of securities 1 and 2 that should be held by the investor whose objective is to minimize risk (assume short sales are not allowed)?
c.Suppose the correlation of returns is -1.0, what fraction of the investor’s net worth should be held in security 1 and in security 2 in order to produce a zero-risk portfolio?
d.What is the expected return on the portfolio in (c)? How does this compare with the riskless return on Treasury Bills of 10%? Would the investor want to invest in Treasury Bills?
Assume that the expected return on the market portfolio is 10%. If a stock with a beta of 2 has an expected return of 15% in this economy, what is the expected return on a stock with a beta of 0.5?
Using historical data you estimate the expected return and beta for Stock A as 9.5% and 1.2, and for Stock B as 14% and 1.8. The expected return of the market portfolio is 9% and the risk-free rate is 5%. If CAPM holds, which stock should you invest in?
Suppose that a single factor APT holds. The risk-free rate is 4% and the expected return on a portfolio with unit sensitivity (sensitivity equal to 1) to the factor is 7%. Consider a portfolio of two securities with the following characteristics:
For this exercise you would need to use the spreadsheet ps2.xls posted on the Blackboard.
Security
Sensitivity to the factor
Proportion in the Portfolio

A
0.8
0.3

B
1.7
0.7

According to APT, what is the portfolio’s equilibrium expected return?
6.Consider an economy where two factors are sufficient to describe the returns on common stocks. Stated formally, we have:
?(?i) = ?ƒ + ?i,1ƒ1 + ?i,2ƒ2
The following table gives the estimated sensitivities of stocks A and B to the two factors, as well as their expected returns.
Stock
?i,1
?i,2
?(?i)

A
0.7
1.4
12.7%

B
2.1
0.7
17.6%

The risk-free rate of return is 5%. Suppose A and B are priced consistently with the two-factor APT above.
(a)Calculate the risk premiums of the two factors (ƒ1 and ƒ2).
(b)Suppose there is another stock, C with sensitivities ??,1 = 0.3 and ??,2 = 0.8. Your analysis shows that holding c your expected return will be 10%. Is c is overvalued, undervalued or correctly priced based on APT?
The file contains information about monthly returns of twelve stocks, AMGN, AMZN, STX, MSFT, BA, WMT, PFE, ABB, YHOO, AAPL, VZ, GOOG, as well as the value-weighted market index excess return (MKT-RF), and the risk-free rate (RF). The sample period begins on January 2004 and ends December 2012.
The spreadsheet is set in a way that you would only need to change the values in cells H122 and T123 in order to control the portfolio weights and the stock/portfolio chosen for the regression calculation.
a.Calculate the Beta and ?2 of each stock by running a regression of the monthly returns
of the stock (excess of the risk-free rate) on the monthly returns of the value-weighted market index (excess of the risk-free rate ). The latter are denoted MKT-RF and they are located on Column P (notice the risk-free rate has already been subtracted from the index). You can choose different stocks by changing the values in cell T123. This would immediately provide you with the excess returns of each stock in Column T. These returns should be used for the regression.
b.Graph a scattered plot of the Security Market Line (SML), i.e. each point on this plot is a pair of the average returns of a stock and its Beta. Calculate the risk premium of the market index as the slope of the regression line in this graph. Is the premium statistically significant? Are these results consistent with the CAPM?
c.Calculate the amount of idiosyncratic risk as a fraction of total risk (1-?2) for five portfolios. The first portfolio includes only AMGN. The second portfolio includes the first three stocks, i.e. AMGN, AMZN, and STX. Similarly, portfolios 3 through 5 include the first six, nine, and twelve stocks, respectively. These portfolios can be chosen by changing the value of cell H122 (change also the value of T123 to 14 to run the regressions for this part).
d.Plot the fraction of idiosyncratic risk as a function of the number of stocks in the portfolio. What is your conclusion?

Consider the following bonds and please answer the questions related to each one

It is easy assignment
. Consider the following bonds and please answer the questions related to each one in the excel worksheet provided with this activity.
Bond 1
Mr. Fahad Alghamdi CFO from Megasoft Corp. decides to issue $1000 bonds with a 3% coupon rate paid semiannually. The bonds mature 10 years from now. Mr. Raj Bhakta searches from Bloomberg.com that the bonds may be purchased for $795 each. What nominal and effective annual rate of return would Mr. Bhakta receive if he purchased the bond now and held it to maturity 10 years from now?
Bond 2
Mr. Jorge Garcia buys a GE bonds from TD Ameritrade for $875. The bond has a face value of $1000 and a 4% coupon rate paid semiannually. If the bond will be paid off at the end of 12 years, what rate of return will Mr. Garcia receive?
Bond 3
Ms. Sarai Toloza bought a $1000 bond of an American airline for $875 just after an interest payment had been made. The bond paid a 6% coupon interest rate semiannually. What nominal rate of return did she receive from the bond if he held it 13.5 years until its maturity?
Bond 4
Ms. Elizabeth Jackson can purchase a municipal bond with a par (face) value of $1000 that will mature in 10 years. The bond pays 6% interest compounded quarterly. If she can buy this bond for $1050, what rate of return will Ms. Jackson earn?
Bond 5
Mr. Kenneth Vega Ocasio buys a corporate bond with a face value of $1000 for $800. The bond matures in 10 years and pays a coupon interest rate of 5%. Interest is paid every quarter. Determine the effective rate of return if Kenneth holds the bond to maturity.
Bond 6
What effective interest rate will Kenneth get if he keeps the bond (bond 5) for only 5 years and sells it for $900?
Bond 7
Mr. Roberto Muntaner Whitley purchased a 5%, $1000 30-year bond for $850 with 22 years to maturity. The interest was payable quarterly. The bond was kept for only 9 years and sold for $950 immediately after the 36th interest payment was received. What nominal and effective rates of return per year were made by Roberto on this investment?
Bond 8
A 9%, $10,000 bond that has interest payable semiannually sells for $8500. If he is planning to hold it until maturity, how long should Mr. Lee Lewis hold this bond? That is, please determine what the maturity date should be, so that Mr. Lewis may enjoy a 12% nominal rate of return on this investment.
Bond 9
ABC Beer Corporation is issuing some zero-coupon bonds, which pay no coupons. At maturity in 15 years they pay a face value of $1000. The bonds are expected to sell for $275 when issued and Mr. Ryan Johnson is interested in buying them. What is the nominal and effective annual interest rate that Ryanreceives?
Bond 10
Using the nominal rate from above, if interest is compounded semiannually, what price would another bond trade at, for par 1000 and 15 year ttm? Ryan is also considering investing in this bond.
Details of all these bonds are available in table 9.1.1 below
Bond01
Bond02
Bond03
Bond04
Bond05
Bond06
Bond07
Bond08
Bond09
Bond10
Price
795
875
875
1050
800
800
850
8500
275
Face Value
1000
1000
1000
1000
1000
1000
1000
10000
1000
1000
Coupon rate
3%
4%
6%
6%
5%
5%
5%
9%
0%
0%
coupon $
compounding n/yr
2
2
2
4
4
4
4
2
1
2
Holding period
10
12
13.5
10
10
5
9
15
15
YTM
12%
8.99%
EAR
9.19%
ttm
10
12
13.5
10
10
10
22
x
15
15

Read the case “Selecting Mutual Funds for Retirement Accounts” attached below and then answer the following questions

Read the case “Selecting Mutual Funds for Retirement Accounts” attached below and then answer the following questions in detail. You work should be 5 full pages long (double-spaced)
Case Questions
1. How much money do you think Alice should put aside for her retirement account?
2.List the critical criteria Alice should consider in deciding which mutual fund(s) to invest in?
3.What do you think of set of Tier 2 and 3 funds available for her to invest in? Do you think the collection of funds in each asset class are good offerings? If not, what would you change?
4.What role, if any, did fees play in your determination of Alice’s portfolio?
5.If you were to pick only 2 funds, what would be those funds? And how would you combine them in her retirement portfolio? Try a few different combinations of the 2 selected funds and decide which one is the best.
Note you need to be able to explain your decisions. Moreover, you need to make some assumptions based on the information that is provided in the case.

Use ?evals to get information about the data and variables in it

Use ?evals to get information about the data and variables in it
Simple regression of teaching score on beauty score
Have a scatterplot of the teaching score on beauty score, with a smooth line added. Does there seem to be a linear relationship? A positive or negative linear relationship?
Run the regression. What is the expected increase in teaching score when the beauty score increases by 1?
Get the raw, standardized, and studentized residual of the model.
Have a scatterplot matrix and correlation matrix for the three residuals.
Using raw residual, get the residual vs. x and histogram of the residuals. Identity if there are any violations of the four assumptions for regression.
What is the R-squared of the model? Interpret it.
3. Multiple regression of teaching score on beauty score and gender
Have a scatterplot of teaching score on beauty score, with different colors for males and females. Add smooth lines separately for male and female
Will you choose a model with interaction or without interaction?
With the model you chose in part b, what is the expected increase in male instructors’ teaching scores when beauty scores increase by 1? What is the expected increase in female instructors’ teaching scores when beauty scores increase by 1?
4. Multiple regression of teaching score on beauty score and age
Will you choose a model with interaction or without interaction?
With the model you chose in part a, what is the expected increase in teaching score when beauty score increases by 1 unit, for all
faculties with age = 37? With age = 57?
At what age level does beauty score negatively affect teaching score?
Have the regression plane for your model in part a.
5. Stepwise and best subset selection
Use pent=0.05 and prem=0.05 to get the stepwise regression model
Is the ID variable in the model you got in part a? If yes, remove it.
Run the best subset selection with the mode you got in part b.
According to AIC, which subset model will be the best? According to BIC (Schwarz’s), which subset model will be the best?

Read the case “Selecting Mutual Funds for Retirement Accounts” attached below

Read the case “Selecting Mutual Funds for Retirement Accounts” attached below and then answer the following questions in detail. You work should be 5 full pages long (double-spaced)
Case Questions
1. How much money do you think Alice should put aside for her retirement account?
2.List the critical criteria Alice should consider in deciding which mutual fund(s) to invest in?
3.What do you think of set of Tier 2 and 3 funds available for her to invest in? Do you think the collection of funds in each asset class are good offerings? If not, what would you change?
4.What role, if any, did fees play in your determination of Alice’s portfolio?
5.If you were to pick only 2 funds, what would be those funds? And how would you combine them in her retirement portfolio? Try a few different combinations of the 2 selected funds and decide which one is the best.
Note you need to be able to explain your decisions. Moreover, you need to make some assumptions based on the information that is provided in the case.

Faith Integration Assignment Instructions Overview The Bible provides insights and guidance for individuals interested in developing higher moral standards in business.

Faith Integration Assignment Instructions Overview The Bible provides insights and guidance for individuals interested in developing higher moral standards in business. It is rich with money management and accounting concepts that can be inferred directly or indirectly. In fact, many of the theories and principles of business finance are (often without the user knowing so) grounded in biblical stories and/or lessons. For example, the concepts of accounting and finance management can be traced back to the time of creation. Adam and Eve were assigned the responsibility of overseeing the Garden of Eden (Gen. 1:28) and Noah was tasked with building the ark, a structure whose magnitude never before been witnessed (Gen. 6). Even the Egyptian monuments such as the pyramids at the time of the Exodus are a reflection of the practices of managing resources. Accounting and finance are applied to many aspects of human life. Today, these concepts are well-developed fields of study with a variety of techniques and mechanisms to achieve their purposes. Indeed, whether you realized it or not, much of what you learned in this class has biblical foundations and/or connections. Instructions Complete an essay describing how the Bible is related to the topics covered in the course. The essay must include a clear integration of the Bible in relation to a course topic. • Assignment length: At least 500 words (excluding title page and references) in current APA format. • Number of citations: At least 2 (in addition to the Bible). You may use the course textbook as one of your sources. Remember: any article/source listed in your references must be cited at least once in your paper. • The Bible may be used as often as you would like, but it only counts as the required use of the Bible – not one of the additional scholarly/professional sources. • Accepted sources: Books or other scholarly/professional sources. Remember, Investopedia, Wikipedia, websites, periodicals (e.g., newspaper, magazine, newsletters), and blogs are not scholarly/professional sources. You can use these in your paper (if properly cited), but they do not count towards the required number of citations.

Guide to answering:
1) Please answer this assignment consisting of 8 questions,

Guide to answering:
1) Please answer this assignment consisting of 8 questions, I’ve solved a couple of questions based on my own understanding of the questions. However, if they’re right please keep the correct answers, if the answers are off please solve them and highlight in Excel.
2)This is an assignment that will be submitted in Excel (attached) so please solve questions not just write the answer, solve answers using excel functions, while explaining the excel formula explanations as well.

Choose an article that relates to investment planning. The articles must be no m

Choose an article that relates to investment planning. The articles must be no more than six months old.
Writing Your Investment Planning Analysis
The Investment Planning Article Analysis must be no more than three pages (900 words) using APA format. You should select your article/topic from legitimate sources, (primarily fromABI/INFORM and Business Source Complete). Papers should go beyond simply summarizing the topic. You earn points for exhibiting critical thinking or adding value through your superior analysis and relating the article to the real world. The articles should be from an online newspaper or magazine. Materials posted on
educational websites, like www.thebalance.com, www.khanacademy.org , and so on, are not considered news articles even if they were recently updated and contain material
related to the term paper topic.
Written projects must be:
1. typed, double-spaced, in 12-point Times New Roman or Arial font, with margins no wider than one inch
2. have footnotes or endnotes, with correct citations
3. have a bibliography of sources used
4. include, for each entry, the author, title, city and state of publisher, publisher’s name, year, and page numbers
5. prepared using word processing software (Microsoft Word preferred), in a manner similar to the preparation of a written assignment for classroom submission
Rubric
-Outstanding effort in completing the Term Paper. The Paper is complete in all respects; and reflects all requirements
-Demonstrates an excellent understanding of the topic(s) and issue(s)
-Presents an outstanding analysis of all issues identified. Makes appropriate and powerful connections between the issues identified and the strategic concepts studied in the reading. Supports diagnosis and opinions with strong arguments and evidence; presents a balanced and critical view; interpretation is both reasonable and objective. Presents detailed, realistic, and appropriate recommendations clearly supported by the information presented and concepts from the reading
-Supplements case study with outstanding research; clearly and thoroughly documents all sources of information
-Writing demonstrates outstanding clarity, conciseness, and correctness; includes thorough details and relevant data and information; extremely well-organized
Supplements case study with outstanding research; clearly and thoroughly documents all sources of information

Choose an article that relates to investment planning. The articles must be no m

Choose an article that relates to investment planning. The articles must be no more than six months old.
Writing Your Investment Planning Analysis
The Investment Planning Article Analysis must be no more than three pages (900 words) using APA format. You should select your article/topic from legitimate sources, (primarily fromABI/INFORM and Business Source Complete). Papers should go beyond simply summarizing the topic. You earn points for exhibiting critical thinking or adding value through your superior analysis and relating the article to the real world. The articles should be from an online newspaper or magazine. Materials posted on
educational websites, like www.thebalance.com, www.khanacademy.org , and so on, are not considered news articles even if they were recently updated and contain material
related to the term paper topic.
Written projects must be:
1. typed, double-spaced, in 12-point Times New Roman or Arial font, with margins no wider than one inch
2. have footnotes or endnotes, with correct citations
3. have a bibliography of sources used
4. include, for each entry, the author, title, city and state of publisher, publisher’s name, year, and page numbers
5. prepared using word processing software (Microsoft Word preferred), in a manner similar to the preparation of a written assignment for classroom submission
https://learn.umgc.edu/content/enforced/738635-ORT…
Rubric
-Outstanding effort in completing the Term Paper. The Paper is complete in all respects; and reflects all requirements
-Demonstrates an excellent understanding of the topic(s) and issue(s)
-Presents an outstanding analysis of all issues identified. Makes appropriate and powerful connections between the issues identified and the strategic concepts studied in the reading. Supports diagnosis and opinions with strong arguments and evidence; presents a balanced and critical view; interpretation is both reasonable and objective. Presents detailed, realistic, and appropriate recommendations clearly supported by the information presented and concepts from the reading
-Supplements case study with outstanding research; clearly and thoroughly documents all sources of information
-Writing demonstrates outstanding clarity, conciseness, and correctness; includes thorough details and relevant data and information; extremely well-organized
Supplements case study with outstanding research; clearly and thoroughly documents all sources of information

Imagine that you are in a position where you need to move – this could be because of a change in job, a need to modify your living arrangements, or something else

SCENARIO: Imagine that you are in a position where you need to move – this could be because of a change in job, a need to modify your living arrangements, or something else. In addition to searching for different housing, you want to begin saving for a specific financial goal.
You will use the Assignment Template (an Excel file) to create a budget that satisfies the scenario. You’ll also answer reflection questions related to your goals.
ASSIGNMENT: This assignment has two parts. In part 1, you will create a financial plan based on the scenario described above. You’ll use your productivity skills to organize your plan, and you’ll use your problem solving skills to determine a reasonable rate of savings to reach your goals. Finally, you’ll apply your technology skills to ensure that your budget is balanced, and expenditures (like housing) don’t exceed your employment income.
In part 2, you will answer reflection questions about the decisions you made and the skills you leveraged while building your plan.
For this assignment, you will:
Create a budget for a financial plan using Microsoft Excel, ensuring that the information is organized, accurate, and complete.
Identify a personal savings goal and a time frame for reaching it.
Explain how your choice of housing will help you achieve your personal savings goal.
Align your expenditures to support your goal.
Reflect on how creating a step-by-step and organized approach to the assignment helps you adjust the financial priorities in your plan.
Download the Excel template below, which further breaks down the steps involved in this assignment.