FINS 3630 Week 2 Tutorial Questions (S2, 2012) 1.

You have $10 million to invest in a firm which has a project that will pay you $12 million with a probability of 0.9 and will pay you 0 with a probability of 0.1. Calculate the following: a. Expected payoff b. Standard deviation of the payoff c. Expected return on the investment d. Standard deviation of the return 2. Now suppose you give the $10 million to a bank which will invest your money in 10 firms with the same payoff structure as the firm in question 1. The payoff to the 10 firms is independent of each other. The bank invests $1 million of your money along with $ 9 million from others in each firm. Calculate the following: a. The probability that you will lose $10 million. b. Your expected payoff c. Standard deviation of your expect payoff d. Your expected return e. Standard deviation of your expect return f. The expected average return of the banks investment g. Standard deviation of the expected average return of the banks investment 3. Can a bank be subject to sovereign risk if it lends only to the highest-quality foreign corporations? End of Chapter Questions and Problems: Chapter 1: 3, 4, 5, 6, 8, 9, 10, 11, 12, 13, 21 Chapter 7: 9, 16, 22, 30, 31, 32, 33