Financial Institutions Management A Risk Management 4th Edition Helen Lange, Anthony Saunders, Marcia Millon Cornett - Solutions

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Now calculate risk-adjusted returns and rerank these countries. More precisely:(a) Calculate the Jensen index for all countries and the world market, and rank all countries (and the world market) according to this measure.(b) Do the same for the Treynor index.(c) Do the same for the Sharpe ratio.
Consider the annual summary statistics for the returns of the G-7 countries and the world market for the ten-year period 1994–2003 reported in Table 10.3. The summary statistics include the mean return (AM), standard deviation (SD), beta with respect to the world market, and semideviation with
Given the returns of the Chinese and the Korean markets in Table 9.4, calculate the VaR of both markets for confidence levels of 95% and 99%. What do you make out of your findings?
Consider the annual returns of the Chinese and the Korean markets(both summarized by the MSCI indices, in dollars, and accounting for both capital gains and dividends) during the years 1994 and 2003 displayed in Table 9.4. Then,(a) Calculate the (arithmetic) mean and standard deviation of both
In order to calculate required returns on equity, use the same inputs discussed before in this chapter, that is, a risk-free rate of 4.3% (the yield on the ten-year US Treasury note at the end of 2003), MRP =6.4%, SMB = 2.9%, and HML = 3.4%.(a) Start by using the first two terms of equation (8.5),
Consider the returns of Abbott Laboratories and Merrill Lynch (ML)between 1994 and 2003 displayed in Table 8.3. This table also shows, for the same period of time, the yield on the ten-year US Treasury note and the returns of the MRP, SMB, and HML portfolios discussed in this chapter.(a) Calculate
using the CAPM.
Using a risk-free rate of 4.3% (the yield on ten-year Treasury notes at the end of 2003) and a market risk premium of 5.5%, calculate the required return on equity of the three companies in question
Consider the annual returns of Berkshire Hathaway (BH), Cisco, Morgan Stanley (MS), and the S&P500 between the years 1994 and 2003 displayed in Table 7.4.(a) Calculate the mean (arithmetic) return of these three companies and the market during the 1994–2003 period.(b) Calculate the beta of each
Given the weights for the Norwegian and Spanish markets in panel B of Table 5.3, calculate the risk, return, and risk-adjusted return (RAR)of those ten portfolios. Then:(a) Make a graph of the feasible set.(b) Calculate the MVP. Would you rather put all your money in Norway or in the MVP? Why?(c)
Consider the annual returns of the Norwegian and Spanish markets, both summarized by the MSCI indices (in dollars and accounting for both capital gains and dividends), displayed in panel A of Table 5.3.Then calculate:(a) The mean annual return of both markets.(b) The annual standard deviation of
Consider, finally, a four-asset portfolio and a five-asset portfolio. In both cases, write the expressions for the risk and the return of each portfolio.
Given the weights for Pepsi and HP in panel B of Table 4.3, calculate the risk and return of those ten portfolios. Then:(a) Make a graph of the feasible set.(b) Of the ten portfolios calculated, which is the one with the lowest risk?(c) Calculate now the MVP using equation (4.3). Is it too
Consider the annual returns of Pepsi and Hewlett-Packard (HP) during the years 1994 to 2003 in panel A of Table 4.3. Then calculate:(a) The mean annual return of both companies.(b) The annual standard deviation of returns of both companies.(c) The correlation of returns between the two companies.
Calculate the geometric mean return of Amex in the way discussed in the previous chapter. Then, using equation (3.2) in this chapter, calculate the approximate geometric mean return for Exxon, Intel, and Amex. Does the approximation seem to work? Does it work in some cases better than in others?
Given the returns of Amex during the period 1994–2003, calculate the(arithmetic) mean return. Then, assuming normality, estimate the interval within which Amex returns should fluctuate with a probability of 95%. How does this interval compare with those discussed in the text for Exxon and Intel?
Given the returns of American Express (Amex) between 1994 and 2003 shown in Table 3.3, calculate the standard deviation of returns.(Just for the sake of completeness, calculate this number with respect to both T and T – l.) Is Amex riskier than Exxon? Is it riskier than Intel?
Given the returns of Exxon shown in Table 2.2, confirm that (as suggested in the text) the standard deviation of those returns is 15.0%.
Table 2.6 displays again the prices of Sun Microsystems at the end of the years 1998 to 2003. It also displays the share purchases of two active strategies. (Note that the second strategy just reverses the order of the purchases.) What is the dollar-weighted return of these two strategies? In which
Compute the absolute difference (AM – GM) and the relative difference (AM/GM – 1) between the arithmetic mean and the geometric mean of General Motors. Then do the same for Wal-Mart. In which stock are these differences larger? Why?
for General Motors, where AM and GM denote the arithmetic and the geometric mean returns, respectively. Which of these two magnitudes matches the terminal wealth you calculated in the previous question?Repeat the exercise for Wal-Mart. What do you make of the findings in this question?
Calculate the quantities $100 · (1 + AM)10 and $100 · (1 + GM)
Suppose you had invested $100 in each of these two stocks (General Motors and Wal-Mart) at the end of 1993 and you had held the investment (and reinvested the dividends received) until the end of 2003. How much money would you have had in each stock at the end of this period?
Given the annual returns of General Motors and Wal-Mart between 1994 and 2003 in Table 2.5, compute the arithmetic mean return and the geometric mean return of both stocks. For each stock, which one of these two means is larger? Is this finding specific to these two stocks or is it more general?
Go back again to Table 1.3 and assume you invested $100 in GE at the end of 1994 (and reinvested all the dividends received). How much money would you have had at the end of 2003? What would have been your nine-year holding period return? What about your nine-year continuously compounded return?
Go back to Table 1.3 and fill in the blanks of the fifth column by computing GE’s annual continuously compounded returns. Then think: in which years is the difference between simple and continuously compounded returns large? In which years is it small?What do you make of this comparison?
Given an initial deposit of $100 and the data in Table 1.4, which shows the nominal interest rate and the compounding period offered by five banks, fill in the blanks of the third and the fifth columns by computing your withdrawal from each bank one year and five years down the road. Then fill in
Given the stock price of General Electric (GE) at the end of the years 1994–2003, and the annual dividend per share paid during those years(both adjusted by stock splits) shown in Table 1.3, fill the blanks of the fourth column by computing GE’s annual simple returns.
1.Go to the APRA website and find Prudential Statement APS 113, and go to Attachment A. Examine the various risk weightings and discuss the logic implied by their structure. Identify the assets that require ratings higher than 150 per cent and discuss why the high ratings may apply in these cases.
1.Go to the website of one of Australia’s major banks—ANZ, Commonwealth Bank, National Australia Bank or Westpac Bank. Find the bank’s latest Pillar 3 disclosure document—often called A330 disclosure—and comment on the bank’s capital position. LO 18.11
1.Go to APRA’s website and find the most recent changes to the three pillars of APRA’s capital adequacy regulation regime. LO 18.10 , 18.11
1.What are the two capital buffers under Pillar 1 of the capital adequacy regulations and when are they used? LO 18.9
1.Why is there a need for an additional regulation covering non-traded interest rate risk? LO 18.6
1.Why does market risk measure both general market risk and specific risk? LO 18.6
1.What is the general approach to the measurement of operational risk capital charge using the standardised approach? LO 18.6
1.Third Bank has the following balance sheet (in millions of dollars) with the risk weights in parentheses.In addition, the bank has $30 million in performance-related standby letters of credit (SLCs), $40 million in two-year forward FX contracts that are currently in the money by $1 million and
1.How does the leverage ratio test impact the stringency of regulatory monitoring of bank capital positions? LO 18.8
1.What is the contribution to the asset base of the following items under the capital adequacy requirements?$10 million cash reserves.$50 million 91-day Australian government securities.$25 million cash items in the process of collection.$5 million UK government bonds, AA rated.$5 million OECD
1.Identify and discuss the problems in the risk-based capital approach to measuring capital adequacy. (See Appendix) LO 18.7
1.How does the risk-based capital measure attempt to compensate for the limitations of the static leverage ratio? LO 18.7
1.Explain how off-balance-sheet market contracts, or derivative instruments, differ from non-market-related off-balance-sheet or contingent guarantee contracts.What is counterparty credit risk?Why do exchange-traded derivative security contracts have no capital requirements?What is the difference
1.Explain the process of calculating risk-adjusted non-market-related off-balance-sheet contracts.What is the basis for differentiating the credit equivalent amounts of non-market-related off-balance sheet transactions?On what basis are the risk weights for the credit equivalent amounts
1.Onshore Bank has $20 million in assets, with risk-adjusted assets of $10 million. Tier I capital is $700 000, and Tier II capital is $300 000. How will each of the following transactions affect the value of the Tier I and total capital ratios? What will the new values of each ratio be?The bank
1.Mercantile Bank has the following balance sheet (in millions of dollars) and has no off-balance-sheet or securitisation activities.What is the value of the regulated capital measures (i.e. common equity Tier 1, total Tier 1, total capital)?What is the value of credit-risk-weighted assets?Assuming
1.Explain the process of calculating credit-risk-adjusted on-balance-sheet assets.What is the basis of risk-weighting of assets to account for credit risk?What are the appropriate risk weights for each category (excluding residential mortgages)? LO 18.5
1.What are the definitional differences between Tier I and Tier II capital? LO 18.5
1.What are the three capital adequacy ratios? What are the minimum requirements for each? LO 18.4 , 18.5 , 18.6
1.What are the major features in the estimation of credit-risk-adjusted assets under the capital regulations? LO 18.6
1.What is Basel III? LO 18.3
1.Identify and discuss the weaknesses of the leverage ratio as a primary measure of capital adequacy. LO 18.1 , LO 18.2
1.What are the arguments for and against the use of market value accounting for FIs? LO 18.1 , 18.2
1.State Bank has the following year-end balance sheet (in millions of dollars): The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising interest rates have caused the failure of a key industrial company and, as a result, 3
1.Why is the market value of equity a better measure of an FI’s ability to absorb losses than book value of equity? LO 18.1 , 18.2
1.What are the differences between the economic definition of capital and the book value definition of capital?How does economic value accounting recognise the adverse effects of credit and interest rate risk?How does book value accounting recognise the adverse effects of credit and interest rate
1.Why are regulators more concerned with the levels of capital held by an FI than a non-financial institution? LO 18.1
1.Identify and briefly discuss the importance of the five functions of an FI’s capital. LO 18.1
1.How does Pillar 3 promote market discipline?
1.What is the objective of Pillar 2 and how does it complement Pillar 1?
1.What is the difference between Pillar 1 and Pillar 2?
1.What are the two capital buffers introduced under Basel III, why are they required and what is the objective of each?
1.Why has APRA introduced a simple leverage ratio to complement the risk-based capital adequacy ratios?
1.How does the measurement of losses across eight business lines using the AMA approach improve the measurement of operational risk compared to the standardised approach?
1.Name five examples of operational risk exposure.
1.Why is operational risk an important risk to capture for capital adequacy purposes?
1.Why are exchange-traded derivative contracts treated differently to over-the-counter derivative contracts in the credit-risk-adjusted asset calculation?
1.Why is there a difference in the way that credit risk is measured in on-balance-sheet assets and off-balance-sheet assets?
1.What is the difference between Tier 1 capital and Tier 2 capital?
1.What are the problems with the simple leverage ratio measure of capital adequacy?
1.How has Basel III expanded the scope of capital regulation for Australian depository institutions?
1.What are the three pillars in the three pillars framework of capital adequacy requirements for Australian depository institutions?
1.Why did regulators introduce a leverage ratio as part of the Basel III capital regulations?
1.Describe the challenge of using a simple leverage ratio only for capital regulation purposes.
1.In what way can capital regulation introduce moral hazard in the management of an FI?
1.What are the four traditional components of an FI’s book equity and how is this different in Australia?
1.Go to the Australian Payments Clearing Association website and find the most recent APCA payments fraud data. Discuss the findings. LO 17.5 ,
1.Go to the RBA website and examine the statistics for the payments system and the use of electronic payments to verify the continued growth in this sector. Has the strong growth continued? Discuss what trends appear in the use of electronic payment methods. LO 17.5
1.What actions has the BIS taken to protect depository institutions from insolvency due to operational risk? LO 17.7
1.How has technology altered the competition risk of FIs? LO 17.5
1.How have crime and fraud risk and the avoidance of regulation been made easier by rapid technological improvements in the electronic payment systems? LO 17.5
1.What does it mean when the central bank acts as a ‘settlement agent’ and how does this minimise settlement risk for a central bank? LO 17.5
1.What is the RTGS and how does it reduce risk in the payment system? LO 17.5
1.Discuss some of the factors that may have resulted in the decline of the usage of cheques in favour of electronic payment methods? LO 17.5
1.What are some of the conclusions of empirical studies on economies of scale and scope? How important is the impact of cost reductions on total average costs? What are X-inefficiencies? What role do these factors play in explaining cost differences among FIs? LO 17.4
1.What is the difference between the production approach and the intermediation approach to estimating cost functions of FIs? LO 17.4
1.A survey of a local market has provided the following average cost data: Mortgage Bank A (MBA) has assets of $3 million and an average cost of 20 per cent. Life Insurance Company B (LICB) has assets of $4 million and an average cost of 30 per cent. Corporate Superannuation Fund C (CSFC) has
1.What are diseconomies of scope? How could diseconomies of scope occur? LO 17.4
1.A bank with assets of $2 billion and costs of $200 million has acquired an investment banking firm subsidiary with assets of $40 million and expenses of $15 million. After the acquisition, the costs of the bank are $180 million and the costs of the subsidiary are $20 million. Does the resulting
1.What are diseconomies of scale? What are the risks of large-scale technological investments, especially to large FIs? Why are small FIs willing to outsource production to large FIs against which they are competing? Why are large FIs willing to accept outsourced production from smaller FI
1.Buy Bank had $130 million in assets and $20 million in expenses before the acquisition of Sell Bank, which had assets of $50 million and expenses of $10 million. After the merger, the bank had $180 million in assets and $35 million in costs. Did this acquisition generate either economies of scale
1.What information on the operating costs of FIs is provided by the measurement of economies of scope? What implications do economies of scope have for regulators? LO 17.4
1.What information on the operating costs of FIs does the measurement of economies of scale provide? If economies of scale exist, what implications do they have for regulators? LO 17.4
1.Distinguish between economies of scale and economies of scope. LO 17.3 , 17.4
1.City Bank upgrades its computer equipment every five years to keep up with changes in technology. Its next upgrade is two years from today and is budgeted to cost $1 000 000. Management is considering moving up the date by two years to install some new computers with a breakthrough software that
1.The operations department of a major FI is planning to reorganise several of its back-office functions. Its current operating expense is $1 500 000, of which $1 000 000 is for staff expenses. The FI uses a 12 per cent cost of capital to evaluate cost-saving projects.One way of reorganising is to
1.What are some of the risks inherent in being the first to introduce a financial innovation? LO 17.1
1.Compare the effects of technology on an FI’s wholesale operations with the effects of technology on an FI’s retail operations. Give some specific examples. LO 17.1 , 17.2
1.Explain how technological improvements can increase an FI’s interest and non-interest income and reduce interest and non-interest expenses. Use some specific examples. LO 17.1
1.What steps have been taken to ensure privacy and protection against fraud in the use of personal and financial consumer information placed on the internet?
1.How has financial technology increased the diversity of financial product offerings?
1.Why do daylight overdrafts create a risk for the financial system and what has the RBA done to minimise these risks in Australia?

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Financial Institutions Management A Risk Management 4th Edition Helen Lange, Anthony Saunders, Marcia Millon Cornett - Solutions

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