A. You have invested in two positions namely, Treausry bills and Zambeef stock. Of your total...

 

 

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A. You have invested in two positions namely, Treausry bills and Zambeef stock. Of your total investment, three-quarters has gone into Zambeef stock. This is purely because you would want to maximise your retums. You can sell your-bills at K90, and Zambeef stock for K80 if you are under pressure to meet some short term obligations. The fair market price for both positions is k100. Compute the liquidity index of your portfolio and interpret the value in relation to liquidity risk. [4 Marks] B. An institution holds 5 million shares of one company and 45 million ounces of a commodity. Share bids are K89.5, offer K90.5. The commodity is bid K15 offer K15.1. What is the liquidation cost in normal markets? [5 Marks] C. Assume that the data above holds, but the mean and standard deviation of the bid- offer spread for the shares is K1 and K2 and for the commodity is 0.1 for both. What is the stressed liquidation cost at 95% confidence? [6 Marks] D. Luyando and Lushomo Banking (LLB) Corporation holds a portfolio of K1billion credit card receivables (outstanding loan balances on credit cards). The average annual default rate over the past 10 years for similar exposures has been 2%. When defaults have taken place the bank has taken these individuals to court and obtained recoveries, net of legal costs, of 10%. Calculate the expected loss for LLB on this investment. [5 Marks] Consider an investor considering to invest in three different securities namely, W, X, and Z There are four possible economic conditions (Boom, Pleasant, Bothersome, and Recession) and the likelihood of each occurring is the equal. The investor has allocated K60,000,000 in stock W out of the total amount of K300, 000,000 available, and has allocated equal amounts in stock X and Y. If a Boom occurs, the investor will make a return of 40% in W, 55% in X and 43% in Y. If a Pleasant state occurs, the investor will make a return of 25% in W, 25% in X and 22% in Y. If a Bothersome condition occurs, the investor will make a return of 8% in W, 7% in X and 2% in Y. If a Recession occurs, the investor will make a return of -20% in W. -25% in X and -10% in Y. Required: Calculate and interpret: A. Expected return of investing in each of the three stocks (W, X, and Y). B. The expected rate of return for the portfolio C. The relative risk for each of the stocks (W, X, Y)? D. The co-variance between stock W and X, W and Y, and X and Y. E. The total portfolio risk A. You have invested in two positions namely, Treausry bills and Zambeef stock. Of your total investment, three-quarters has gone into Zambeef stock. This is purely because you would want to maximise your retums. You can sell your-bills at K90, and Zambeef stock for K80 if you are under pressure to meet some short term obligations. The fair market price for both positions is k100. Compute the liquidity index of your portfolio and interpret the value in relation to liquidity risk. [4 Marks] B. An institution holds 5 million shares of one company and 45 million ounces of a commodity. Share bids are K89.5, offer K90.5. The commodity is bid K15 offer K15.1. What is the liquidation cost in normal markets? [5 Marks] C. Assume that the data above holds, but the mean and standard deviation of the bid- offer spread for the shares is K1 and K2 and for the commodity is 0.1 for both. What is the stressed liquidation cost at 95% confidence? [6 Marks] D. Luyando and Lushomo Banking (LLB) Corporation holds a portfolio of K1billion credit card receivables (outstanding loan balances on credit cards). The average annual default rate over the past 10 years for similar exposures has been 2%. When defaults have taken place the bank has taken these individuals to court and obtained recoveries, net of legal costs, of 10%. Calculate the expected loss for LLB on this investment. [5 Marks] Consider an investor considering to invest in three different securities namely, W, X, and Z There are four possible economic conditions (Boom, Pleasant, Bothersome, and Recession) and the likelihood of each occurring is the equal. The investor has allocated K60,000,000 in stock W out of the total amount of K300, 000,000 available, and has allocated equal amounts in stock X and Y. If a Boom occurs, the investor will make a return of 40% in W, 55% in X and 43% in Y. If a Pleasant state occurs, the investor will make a return of 25% in W, 25% in X and 22% in Y. If a Bothersome condition occurs, the investor will make a return of 8% in W, 7% in X and 2% in Y. If a Recession occurs, the investor will make a return of -20% in W. -25% in X and -10% in Y. Required: Calculate and interpret: A. Expected return of investing in each of the three stocks (W, X, and Y). B. The expected rate of return for the portfolio C. The relative risk for each of the stocks (W, X, Y)? D. The co-variance between stock W and X, W and Y, and X and Y. E. The total portfolio risk