Answers: Risk Aversion and Security

Your assistant, Thomas, is instruct you on the current portfolio and states We have in addition much of our portfolio in Alpha. We should probably impress some of those funds into Gamma so we can achieve better diversification. Is he right? Hint Feel large-minded to use spreadsheet statistical functions. Here is the entropy on solely three stocks. Assume, for convenience, that all three securities do not comport dividends. Alpha, underway charge 40 electric current Weight 80% Next Years wrong Expansion 48, no(prenominal)mal 44, Recession 36 Beta, contemporary expense 27. 0 Current Weight 20% Next Years Price Expansion 27. 50, Normal 26, Recession 25 Gamma, Current Price 15 Current Weight 0% Next Years Price Expansion 16. 50, Normal 19. 50, Recession 12. It depends. No. Yes. Answer Yes Question 10 (15 points) imagine t here are two mortgage bankers. Banker 1 has two $1,000,000 mortgages to betray. The borrowers live on opposite sides of the country and face an sover eign probability of default of 5%, with the banker competent to save up 40% of the mortgage protect in case of default.Banker 2 similarly has two $1,000,000 mortgages to sell, but Banker gs borrowers live on the same street, have the same blood line security and income. Put differently, the fates and thus solvency of Banker gs borrowers represent in lock step. They have a probability of defaulting of 5%, with the banker able to salvage 40% of the mortgage value in case of default. Both Bankers plan to sell their exceptive mortgages as a bundle in a mortgage-backed security (MBPS) (I. E. , as a portfolio). Which of the following is correct?Banker gs MBPS has a high judge reproduction and much risk. Banker Xis MBPS has a higher judge return and slight risk. Banker Xis MBPS has a higher expected return and more risk. Banker gs MBPS has more risk, but the expected returns on both MBPS are the same. Banker Xis MBPS has more risk, but the expected returns on both MBPS are the same. Banker gs MBPS has a higher expected return and less risk. The same. In symmetry with the Coursers Honor Code, I (Oddity Vats) certify that the answers here are my own work.