Portfolio Problems that deal with average returns and standard deviation, return on stock, ect. There are 9 questions to be answered. Please review attachment in detail to assure questions can be ac
Portfolio Problems
Average Returns and Standard Deviation
An insurer is considering investing in one of two bond portfolios, below are the returns for each portfolio. Calculate the average return (arithmetic) and standard deviation for each portfolio. Assuming the last 15 years are representative of the entire life of the bond portfolios, in which portfolio should the insurer invest? Why?
| Year | Portfolio A Returns | Portfolio B Returns |
| 2002 | 4.20% | 5.60% |
| 2003 | 3.90% | 3.10% |
| 2004 | 5.10% | -5.00% |
| 2005 | -1.20% | -3.00% |
| 2006 | 3.60% | 4.50% |
| 2007 | 1.00% | 6.90% |
| 2008 | -2.30% | 6.80% |
| 2009 | 5.30% | 5.30% |
| 2010 | 3.60% | 7.50% |
| 2011 | 2.90% | -3.60% |
| 2012 | -3.00% | -2.10% |
| 2013 | 3.40% | 4.50% |
| 2014 | 6.40% | 3.60% |
| 2015 | 3.50% | 2.60% |
| 2016 | 4.00% | 3.10% |
An insurer is considering one of the following four bond portfolios. Calculate the average return (arithmetic) and standard deviation for each portfolio. . Calculate the average return (arithmetic) and standard deviation for each portfolio. Assuming the last 20 years are representative of the entire life of the bond portfolios, in which portfolio should the insurer invest? Why?
| Year | ||||
| 1997 | 10.00% | 11.00% | -3.00% | 1.90% |
| 1998 | 5.10% | 5.60% | 4.50% | 5.60% |
| 1999 | -2.30% | 1.10% | 6.90% | 3.10% |
| 2000 | -3.20% | -5.20% | 6.80% | -5.00% |
| 2001 | 4.10% | 1.90% | 5.30% | -3.20% |
| 2002 | 4.20% | 5.60% | 5.10% | 4.10% |
| 2003 | 3.90% | 3.10% | -2.30% | 4.20% |
| 2004 | 5.10% | -5.00% | -3.20% | 3.90% |
| 2005 | -1.20% | -3.00% | 4.10% | -3.20% |
| 2006 | 3.60% | 4.50% | -2.30% | 4.10% |
| 2007 | 1.00% | 6.90% | -3.20% | 4.20% |
| 2008 | -2.30% | 6.80% | 4.10% | 3.90% |
| 2009 | -3.20% | 5.30% | 4.20% | 11.00% |
| 2010 | 4.10% | 7.50% | -2.10% | 5.60% |
| 2011 | 4.20% | -3.60% | 4.50% | 1.10% |
| 2012 | 3.90% | -2.10% | 3.60% | -5.20% |
| 2013 | 3.40% | 4.50% | 2.60% | 1.90% |
| 2014 | 6.40% | 3.60% | 3.10% | 6.50% |
| 2015 | 3.50% | 2.60% | 6.50% | 7.30% |
| 2016 | 4.00% | 3.10% | 7.30% | 2.10% |
| Average Return | ||||
| Standard Deviation |
Expected Returns and Portfolio Expected Returns
NMIC is currently holding a junk bond that has a 20% yield to maturity. However, there is a probability that the bond issuer may not be able to pay the coupon payment and face value. There is a 95% chance that the bond issuer will pay the coupon payment and face value. There is a 4% chance that the bond issuer will default and NMIC will only be able to recover 80% of the face value. This represents a 1% return on their investment. Finally, there is a 1% chance that the bond issuer will default and NMIC will receive nothing, representing a -100% return on their investment. What is the expected return for NMIC on this bond?
NMIC has $200M of assets to invest in any given year. Last year, NMIC invested $100M in high-grade long term corporate bonds, $25M in high-grade short term corporate bonds, $15M in stocks, and the remainder in municipal bonds. Calculate the portfolio weights for NMIC.
Given the portfolio weights for NMIC calculated in problem four, what was NMIC portfolio returns last year if each area had the following returns:
| Portfolio Component | Component Return |
| High-Grade Long Term Corporate Bonds | 5.5% |
| High-Grade Short Term Corporate Bonds | 2.3% |
| Stocks | 7.2% |
| Municipal Bonds | 3.1% |
NMIC has $350M of assets to invest this year. What is NMIC’s expected return on the following portfolio:
| Portfolio Component | Component Investment | Component Return |
| High-Grade Long Term Corporate Bonds | $150M | 5.5% |
| High-Grade Short Term Corporate Bonds | $50M | 2.3% |
| Stocks | $75M | 7.2% |
| Municipal Bonds | $75M | 3.1% |
Systemic Risk, Beta, & CAPM
NMIC is trying to determine the appropriate rate of return on a particular stock that they are considering purchasing during the IPO. The expected market return is 6% and the risk-free rate of return is 1.5%. The new stock is expected to have a beta of 1.3. What is the appropriate return on that stock?
What is the return on the stock from question 7 if the beta estimate was .6 rather than 1.3?
Fill in the missing values on the table below:
| Return on Asset | Risk Free Rate | Beta | Expected Market Return | |
| Asset #1 | 2% | .81 | 7.5% | |
| Asset #2 | 7.375% | 1.25 | 6.9% | |
| Asset #3 | 6.324% | 1.5% | 8.3% | |
| Asset #4 | 5.294% | 1.0% | 1.63 |
