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Virtual Banking, Interest Rate, Risk and Return for Portfolio

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-) What is the price of a 91-day treasury bill when market yields are eight percent?

-) Explain how caps, floors, and collars are used to control interest-rate risk.

-) What is meant by the term virtual banking? Outline the advantages and disadvantages of virtual banking to the public.

-) Please see attached page for question

You have been given the following information:
Expected Return Proportion of Portfolio Standard Deviation of
Expected Return
Asset A .05 0.4 0.5
Asset B .02 0.6 0.2
Asset C .03 — 0.9
The correlation coefficient between asset A and asset B is +1, and between asset C and asset B it is +0.05.

a. Calculate the expected return and the risk of return for a portfolio consisting of assets Aand B.

b. How does the risk of return for this portfolio change if the correlation coefficient between assets A and B is +0.5 rather than +1? What conclusions can you draw from this change with respect to portfolio diversification for the reduction of risk?

c. By how much is the risk of the portfolio reduced when asset A is replaced by asset C?

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Solution Summary

This solution defines virtual banking and its advantages and disadvantages, risk and return on portfolio and the valuation of t-bill. It also conducts step-by-step calculations to determine various factors.