Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A financial risk-taker is thinking about investing a fund of $12,000,000 in a portfolio of high risk bonds of various financial trusts, which offer yields

A financial risk-taker is thinking about investing a fund of $12,000,000 in a portfolio of high risk bonds of various financial trusts, which offer yields higher than the market but at relatively high chance of defaults. The following table summaries the yield of five candidate bonds under his consideration as well as the default ratios of the individual bonds.

Bond Code Type of Trust Yield (% p.a.) Default Ratio (within 1 year)
B1 Personal Loan 14 10/100
B2 Automobile Mortgage 13 7/100
B3 Realty Mortgage 12.5 3/100
B4 Farm Financing 12 5/100
B5 Commercial Loan 10 2/100

Based on financial advisors opinion, the investor decides to allocate at least 40% of the fund to bonds of farm financing and commercial loans. To balance the relative risks, the proportion on bonds of realty mortgage must be at least 50% of those on personal loan, car and realty mortgages. Moreover, the overall default ratio of the portfolio cannot exceed 4/100. All the bonds to be acquired on the same day to the portfolio. Determine the amount to be allocated to each of the five candidate bonds in order to maximize the net total yield of the portfolio.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jack Kapoor, Les Dlabay, Robert Hughes

10th Edition

0073530697, 9780073530697

More Books

Students also viewed these Finance questions

Question

Did the researcher seek out those who are silent and marginalized?

Answered: 1 week ago