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Long Dong Chinese Man

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This assignment covers Statistics as related to finance. Refer to Note on Review of Statistics before you attempt this assignment. And feel free to use the statistical functions in Excel/Spreadsheets to calculate stuff. In accordance with the Coursera Honor Code, I (Amanda Milligan) certify that the answers here are my own work.

Shareholders of Exxon Oil Company face a variety of risks in holding its shares. If the economy falters, people tend to travel less and so there is less demand from the airlines industry for Exxon’s fuels.

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This type of risk that Exxon’s shareholders bear is Specific/Idiosyncratic Risk.

Suppose there are three securities (X, Y, and Z) to choose from, and next year the economy will be in an expansion, normal, or recession state with probabilities 0.30, 0.35, and 0.35, respectively. The returns (%) on the securities in these states are as follows: Security X {expansion = +10, normal = +8, recession = +6}; Security Y {+25,+10,-10}; Security Z {+7.5,+7.5,+7.5}. If the investor is risk neutral and must choose whether to invest in Security Y or Security Z, which would she buy? Indifferent between Y & Z.

Suppose your dear old Grandfather approaches you for investment advice. He knows of your great training in finance and statistics and gives the following instructions: “I have lived a long time and through many challenges. But the recent financial upheaval, with its ups and downs, is too much for me to bear. Just pick for me a portfolio with the least risk.” Suppose there are portfolios (A, B, and C) to choose from, and next year the economy will be in an expansion, normal, or recession state with probabilities 0.40, 0.40, and 0.20 respectively. The returns (%) on the portfolios in these states are as follows: Portfolio A {expansion = +13, normal = +9, recession = +8.5}; Portfolio B {+10,+9,+5}; Portfolio C {+13,+8,+7.5}. Which investment best fits your grandfather’s needs?

Since investors are typically risk averse, they require a risk premium for any additional risk, regardless of source, that holding a security requires them to bear.

While computing covariances among the returns of several stocks can be complicated, the covariance of a stock’s return with itself is always one.

As a CEO you wish to maximize the productivity of your workers. You are thinking about providing your employees with smartphones so they can be readily available to clients and increase sales. However, you are also concerned that your employees are just as likely to download apps that will distract them from their work, leading them to play games and update their social networking sites rather than focus on the job of pleasing clients. To test this you randomly select 6 employees for an experiment. You provide 3 with the new smart phone and the other 3 use their existing technology. The following chart shows their changes in sales. Based on this small sample, what is the correlation between smartphone and increase in sales? It may help to use the spreadsheet function correl to calculate the correlation. Also, enter the correlation in percentage terms with no more than two decimals, but do not enter the % sign. Anthony, Smartphone: Yes; change in sales 60; Kira, Smartphone No; Change in Sales 40; Michael, Smartphone No; Change in Sales 60; Scarlett., Smartphone Yes; Change in Sales 35;Pete, Smartphone Yes; Change in Sales -20; Angela, Smartphone No; Change in Sales -5.

Investors generally do not like to bear risk. Because of this, the price of an otherwise identical government bond relative to a corporate bond will be Higher.

Suppose your client is risk-averse but can invest in only one of the three securities, X, Y, or Z, in an uncertain world characterized as follows. Next year the economy will be in an expansion, normal, or recession state with probabilities 0.40, 0.40, and 0.20, respectively. The returns (%) on the three securities in these states are as follows: Security X {expansion = +14, normal = +10, recession = +7}; Security Y {+11, +9, +8}; Security Z {+13, +8, +7.5}. Which security can you rule out, that is, you will not advise your client to invest in it?

You have just taken over as a fund manager at a brokerage firm. Your assistant, Thomas, is briefing you on the current portfolio and states “We have too much of our portfolio in Alpha. We should probably move some of those funds into Gamma so we can achieve better diversification.” Is he right? [Hint: Feel free to use spreadsheet statistical functions. Here is the data on all three stocks. Assume, for convenience, that all three securities do not pay dividends. Alpha, Current Price 40; Current Weight 80%; Next Year’s Price: Expansion 48, Normal 44, Recession 36; Beta, Current Price 27.50; Current Weight 20%; Next Year’s Price: Expansion 27.50, Normal 26, Recession 25; Gamma, Current Price 15; Current Weight 0%; Next Year’s Price: Expansion 16.50, Normal 19.50, Recession 12.

Suppose there are two mortgage bankers. Banker 1 has two $1,000,000 mortgages to sell. The borrowers live on opposite sides of the country and face an independent probability of default of 5%, with the banker able to salvage 40% of the mortgage value in case of default. Banker 2 also has two $1,000,000 mortgages to sell, but Banker 2’s borrowers live on the same street, have the same job security and income. Put differently, the fates and thus solvency of Banker 2’s borrowers move in lock step. They have a probability of defaulting of 5%, with the banker able to salvage 40% of the mortgage value in case of default. Both Bankers plan to sell their respective mortgages as a bundle in a mortgage-backed security (MBS) (i.e., as a portfolio).

Cite this Long Dong Chinese Man

Long Dong Chinese Man. (2016, Jul 05). Retrieved from https://graduateway.com/long-dong-chinese-man/

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