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NEW QUESTION: 1
There are three bonds in a diversified bond portfolio, whose default probabilities are independent of each other and equal to 1%, 2% and 3% respectively over a 1 year time horizon. Calculate the probability that none of the three bonds will default.
A. 0.0006%
B. 0.11%
C. 94%
D. 2%
Answer: C
Explanation:
Explanation
The probability that only none of the three bonds will default is equal to the probability of all surviving. Since default correlation is zero, we can simply multiply the probabilities of survival. Therefore the correct answer is
94% = (1 - 1%) * (1 - 2%) * (1 - 3%)
NEW QUESTION: 2
As the persistence parameter under EWMA is lowered, which of the following would be true:
A. The model will react faster to market shocks
B. High variance from the recent past will persist for longer
C. The model will react slower to market shocks
D. The model will give lower weight to recent returns
Answer: A
Explanation:
Explanation
The persistence parameter, , is the coefficient of the prior day's variance in EWMA calculations. A higher value of the persistence parameter tends to 'persist' the prior value of variance for longer. Consider an extreme example - if the persistence parameter is equal to 1, the variance under EWMA will never change in response to returns.
1 - is the coefficient of recent market returns. As is lowered, 1 - increases, giving a greater weight to recent market returns or shocks. Therefore, as is lowered, the model will react faster to market shocks and give higher weights to recent returns, and at the same time reduce the weight on prior variance which will tend to persist for a shorter period.
NEW QUESTION: 3
A firm's ROE equals 47%. Its financial leverage (assets/equity) equals 1.8 and its asset turnover is 0.8.
If the firm's total net sales equal $1.35 million, its net income equals ________.
A. $282,000
B. $352,500
C. $440,625
Answer: C
Explanation:
ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (net income/sales)*(asset turnover)*(financial leverage) Therefore, net income = 0.47*1.35/(0.8*1.8) million =
4 40,625.
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