Finance help

Running Head: FINANCE 1

FINANCE 3

DEAR of Aggregate portfolio

Name of Student

Name of institution

Date

17. Jeff Resnick, vice president of operations of Choice Bank, is estimating the aggregate DEAR of the bank’s portfolio of assets consisting of loans (L), foreign currencies (FX), and common stock (EQ). The individual DEARs are $300, $700, and $126,700 respectively. If the correlation coefficients ij between L and FX, L and EQ, and FX and EQ are 0.3, 0.7, and 0.0, respectively, what is the DEAR of the aggregate portfolio?

Solution

DEAR of aggregate portfolio is the square root of the sum of position for the constituent portfolios, first determined through addition of all individual DEARs and dear due to correlation coefficients for each of the three then find the squire root of the sum of the constituents.

The formula for this case would be,

Where P denotes the correlation coefficient.

=126,7002+7002+3002+ 2(0.0)(700)(126,700)+2(0.3)(300)(700)+2(0.7)(300)(126,700)

=16,106,810,000

DEAR PORTFOLIO=(16,106,810,000)^1/2

=$126,912

33. The current one-year Treasury bill rate is 5.2 percent, and the expected one-year rate 12 months from now is 5.8 percent. According to the unbiased expectations theory, what should be the current rate for a two-year Treasury security?

Solution

According to the expectation theory (unbiased expectation theory) state that a long term interest rate can dictate short term interest rates in the future, therefore the current rate for the two year treasury will be,

(R+1)2 = (1+0.052) (1+0.058) = 1.113016

R= (1.113016^1/2)-1 =1.0549-1=0.0549

R=5.49%