What is defined as the risk related to the uncertainty of an FI’s earnings on its...
What is defined as the risk related to the uncertainty of an FI’s earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions?
- Interest rate risk
- Credit risk
- Sovereign risk
- Market risk
- Default risk
Homework Answers
Ans d. Market risk
Market risk is the risk of loosing due to factors that affect the overall performance of the market. It is also known as systematic risk. It cannot be eliminated through diversification.
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What is defined as the risk related to the uncertainty of an
FI’s earnings on its...
b. An asset's reward-to-risk ratio is defined as its risk premium divided by its standard deviation....
b. An asset's reward-to-risk ratio is defined as its risk premium divided by its standard deviation. It is a useful statistic to summarize the asset's risk-return trade-off. Consider the following information: Stock A has a reward-to-risk ratio of 0.4 and stock B has a reward-to-risk ratio of 0.33. Stock A's risk premium is 8%, stock B's risk premium is 10% and the market risk premium is 7%. The correlation between stocks A and B is 0.6. Assume the CAPM holds....
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1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect...
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? 2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? 3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required...
Financial risk forms : • Market value risk • interest rate risk, • exchange prices, • Asset prices price • default risk...
Financial risk forms : • Market value risk • interest rate risk, • exchange prices, • Asset prices price • default risk • Risk of liquidity Non-Financial risk forms: • Business Risk( chances of failure of business) • Operational Risk (misconduct,fraud etc) • Accounting risk (changes in GAAP/IFRS and comparability issues, managed earnings, etc.) • Legal and Regulation risk • Tax risk • environment risk • Strategic risk Elaborate on each of the risk factors with examples
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Question1 This is defined as the portion of total risk that is not diversifiable firm specific risk O market risk O total risk O modern portfolio risk DI Question 2 4 pts A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return? C) 55.625% 39.375% , 48.875% ( 33.25% nativeplayba....collab BlackboardColl....msi nativeplayba....collab 4:
10a. If the expected default rate on a credit card is 8.5% and the risk-free rate is 3.25%, what interest rate must a fi...
10a. If the expected default rate on a credit card is 8.5% and the risk-free rate is 3.25%, what interest rate must a financial institution charge on the credit card in order for its expected return to equal the risk-free rate? If the financial institution assumes a 0% recovery rate in the event of default, what interest rate will the financial institution charge? b. If the expected default rate on a 1-year home equity loan is 2.5% and the financial...
a) Suppose the company decided to payout 90% of its earnings as dividends, what would be...
a) Suppose the company decided to payout 90% of its earnings as
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(t=0)
Set-up for all parts: Suppose that the rate of return on the market portfolio is 10% and the risk-free rate is 5%. Consider a stock with beta is 1.3. The firm is expected to have no earnings in the first year (E1 = 0), and then $10 earnings-per-share in the second year (E2 = 10). After...
What security will have more reinvestment rate risk a 5-year zero coupon bond or a perpetuity,...
What security will have more reinvestment rate risk a 5-year zero coupon bond or a perpetuity, why? The 5-year zero coupon bond will have more risk associated with the uncertainty of what the proceeds from this investment will earn in the future after the 5 year zero matures and is invested again in the market. The perpetuity will have more risk associated with the certainty of what the proceeds from this investment will earn in the future. The perpetuity will...
First Bank is a financial service firm that is in stable growth. Its current earnings are...
First Bank is a financial service firm that is in stable growth. Its current earnings are expected to grow 5% a year in perpetuity, and its stock has a beta of 0.90. If the Treasury bond rate is 6%, the market risk premium is 5.5%, and the stock is trading at a current PE ratio of 10.59, estimate First Bank’s return on equity.
a company's return on equity is greater than its required return on equity. the earnings multiplier...
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b. An asset's reward-to-risk ratio is defined as its risk premium divided by its standard deviation. It is a useful statistic to summarize the asset's risk-return trade-off. Consider the following information: Stock A has a reward-to-risk ratio of 0.4 and stock B has a reward-to-risk ratio of 0.33. Stock A's risk premium is 8%, stock B's risk premium is 10% and the market risk premium is 7%. The correlation between stocks A and B is 0.6. Assume the CAPM holds....
1) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond? 2) Define what is meant by interest rate risk. Assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction? 3) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required...
Question1 This is defined as the portion of total risk that is not diversifiable firm specific risk O market risk O total risk O modern portfolio risk DI Question 2 4 pts A company has a beta of 3.75. If the market return is expected to be 20 percent and the risk-free rate is 9.5 percent, what is the company's required return? C) 55.625% 39.375% , 48.875% ( 33.25% nativeplayba....collab BlackboardColl....msi nativeplayba....collab 4:
a) Suppose the company decided to payout 90% of its earnings as
dividends, what would be the fundamental value of the stock today?
(t=0)
Set-up for all parts: Suppose that the rate of return on the market portfolio is 10% and the risk-free rate is 5%. Consider a stock with beta is 1.3. The firm is expected to have no earnings in the first year (E1 = 0), and then $10 earnings-per-share in the second year (E2 = 10). After...
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