What happens to the value of the diversified portfolio

Assignment Help Finance Basics
Reference no: EM13264925

Construct a spreadsheet to replicate the analysis of the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table:

a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio?

b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?

c. Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio compare to that of the five-asset portfolio? How does it compare if the single-asset portfolio earns a 6 percent annual return?

Diversification Illustration (Invest $10,000 over 25 years)

Investment Strategy 1: All funds in one asset

Investment Strategy 2: Invest Equally in five different assets

Number of assets

1

Number of assets

5

Initial investment

$10,000

Amount invested per asset

2000

Number of years

25

Number of years

25

Annual asset return

7%

5 asset returns (annual)

Total accumulation at the end of time frame: Total funds

$54,274.33

?100%

Asset 1 return

Asset 2 return

0%

Asset 3 return

5%

Asset 4 return

10%

Asset 5 return

12%

Total accumulation at the end of time frame:

Asset 1

$0.00

Asset 2

$2,000

Asset 3

$6,772.71

Asset 4

$21,669.41

Asset 5

$34,000.13

Total funds

$64,442.25

 

Reference no: EM13264925

Previous Q& A

  A concentration of reactants the rate of appearance of water

At a certain concentration of reactants the rate of appearance of water in the following reaction is 0.43 M/s.

  What is the expected value from a single roll

Would a risk-averse investor be willing to pay the expected value for the opportunity to play?

  Explain the activation energy be for the rate constant

The rate constants of some reactions double with every 10 degree rise in temperature. Assume that a reaction takes place at 340 K and 350 K. What must the activation energy be for the rate constant to double as described

  Calculate the number of resistors and switches needed

Calculate the number of resistors and switches needed for a resistor ladder DAC for each case: a. 3 bit DACb. 7 bit DAC c. 25 bit DAC d. 42 bit DAC

  What is her speed at the bottom of the hill

A snowboarder starts from rest and glides down a hill that is 100m high. Assuming no friction, what is her speed at the bottom of the hill

  What is the relationship between camber and clmax

What is the relationship between Camber and CLmax? the relationship between Camber and zero lift (Cl = 0) And the relationship between airfoil thickness and CLmax

  Explain the enthalpy change if the feed into a reactor

6HF + SiO2 => H2SiF6 + 2H2O Delta Hrxn = -670kJ/mol, What is the enthalpy change if the feed into a reactor contains 3 mol HF and 1.5 mol SiO2

  Were the price changes the same

What is the value of your portfolio? What happens to the value of your portfolio if the yield to maturity on the bonds rises by one percentage point?

  Find the gravitational potential energy of the two-particle

A 4.9 kg particle and a 2.7 kg particle have a gravitational attraction with a magnitude of 2.6 ? 10-12 N. What is the gravitational potential energy of the two-particle system

  Compute the theoretical ph of a solution made

How do I calculate the theoretical pH of a solution made of 25 mL 0.10 M acetic acid and 25 mL 0.10 M sodium acetate

Reviews

Write a Review

 

Similar Q& A

  Calculate standard deviation and coefficient of variation

A stock's return has the following distribution, Demand for the Probability of This Rate of Return Company's Products Demand Occuring if This Demand Occurs

  Useful models for valuing derivatives

The derivatives market is complex because derivative buying and selling includes many things like financial contracts.

  Debt and defeasance of the present issue

You have decided to advance refund $10,000,000 of outstanding debt that is callable in 5-years. The interest rate on these bonds is 8%. You can issue new bonds at 6%.

  Compute the price of security

You have just bought a security which pays $500 every six months. The security lasts for 10-years. Another security of equal risk also has a maturity of 10-years, and pays 10% compounded monthly.

  Determine the best alternative

Suppose your uncle has given you three options for your inheritance. You can have $10,000 now; $2,000 per year for the next eight years; or $24,000 at the end of 8-years.

  Will this factor change the firms decision

The after-tax cash inflows associated with this purchase are projected to amount to $250,000 per year for 15 years. Will this factor change the firm's decision about how to fund the initial investment.

  Binomial option and risk-neutral

Critically discuss the differences between the binomial option pricing model and risk-neutral method of option pricing.

  Formula for effective interest rate

Find out the formula we would employ to compute the effective interest rate offered on cash discounts?

  What is the bonds yeild to maturity

An 8-year bond for Katy Corporation has a market price of $700 and a par value of $1000. If the bond has an annual interest rate of 6 percent, but pays interst semiannually, what is the bond's yeild to maturity?

  Establish a pre- and post-money valuation

Assume as a VC that you want to establish a pre- and post-money valuation in support of the issuance of a term sheet

  Find the capital gains yield

Calculation of Firms growth Rate and Capital Gains Yield at given dividend options -  Find the Capital Gains Yield?

  Determine one share of stock worth today

Dry Goods is expected to pay yearly dividends of 1.15 , 1.20 and 1.35 a share over the next 3 years, respectively. After that the dividend is expected to increase by 2.5 percent yearly.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd