D The Incomplete Table below shows the statistics of 3 Shares obtained from historical data of...

 

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D The Incomplete Table below shows the statistics of 3 Shares obtained from historical data of the companies and the market. The Expected return of the market, FM = 6% and the risk-free rate, rf is 2%. Share Alpha, Beta, Expected Excess a Return, Return T ii) A B C 5% 0% 1.2 0.8 3% 8% to Beta, ERB 8% Specific risk, n 103.94% 50.98% Total Risk, 110% 68% Find the values of the missing cells. [4] -) Two shares have higher ERBS than the Elton Gruber optimal cut-off rate. How will the market portfolio be adjusted? Identify the shares involved. No calculations are required.[3] Compute the Sharpe and Treynor Ratios for the share with the Highest ERB and comment on their relevance. [3] Use the risk values of Share A to show that the Risk of the market, OM = 30%. [2] An SME has a variable rate loan from a Bank with rolling quarterly Interest Payments of Libor + 3.5%. To protect against excessive rates the Investment wing of the Bank, sells the SME an interest cap at 4% using a series of European Style 3 month Interest Rate Put Options at the Exercise Price of 96.00. Explain how this arrangement provides the SME with a cap of 4% on it floating interest rates payments. [4] The Investment Bank offers to buy corresponding Call Options from the SME. Give one advantage and one disadvantage in the SME writing these Call options. [2] Bank AAA is able to borrow at a variable rate of Libor + 4% or at fixed rate of 7%. Bank BBB is able to borrow at a variable rate of Libor + 6.0% or at a fixed rate of 8.0%. Explain how a swap is feasible between the banks and show with a diagram the flow of interest rate payments between the banks and their respective lenders under the swap arrangement. [7] D The Incomplete Table below shows the statistics of 3 Shares obtained from historical data of the companies and the market. The Expected return of the market, FM = 6% and the risk-free rate, rf is 2%. Share Alpha, Beta, Expected Excess a Return, Return T ii) A B C 5% 0% 1.2 0.8 3% 8% to Beta, ERB 8% Specific risk, n 103.94% 50.98% Total Risk, 110% 68% Find the values of the missing cells. [4] -) Two shares have higher ERBS than the Elton Gruber optimal cut-off rate. How will the market portfolio be adjusted? Identify the shares involved. No calculations are required.[3] Compute the Sharpe and Treynor Ratios for the share with the Highest ERB and comment on their relevance. [3] Use the risk values of Share A to show that the Risk of the market, OM = 30%. [2] An SME has a variable rate loan from a Bank with rolling quarterly Interest Payments of Libor + 3.5%. To protect against excessive rates the Investment wing of the Bank, sells the SME an interest cap at 4% using a series of European Style 3 month Interest Rate Put Options at the Exercise Price of 96.00. Explain how this arrangement provides the SME with a cap of 4% on it floating interest rates payments. [4] The Investment Bank offers to buy corresponding Call Options from the SME. Give one advantage and one disadvantage in the SME writing these Call options. [2] Bank AAA is able to borrow at a variable rate of Libor + 4% or at fixed rate of 7%. Bank BBB is able to borrow at a variable rate of Libor + 6.0% or at a fixed rate of 8.0%. Explain how a swap is feasible between the banks and show with a diagram the flow of interest rate payments between the banks and their respective lenders under the swap arrangement. [7]

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1 Market risk m 30 Share Alpha Expected Return Rf ERB Excess Return to Beta ERB Specific risk Total ... View the full answer