portfolio project

timer Asked: Apr 27th, 2013

Question Description

I don’t know how to handle this Business question and need guidance.

Task 1:

a. You own a two-bond portfolio. Each has a par value of

$1,000. Bond A matures in five years, has a coupon rate

of 8 percent, and has an annual yield to maturity of 9.20

percent. Bond B matures in fifteen years, has a coupon

rate of 8 percent and has an annual yield to maturity of

9.20 percent. Both bonds pay interest semi-annually.

What is the value of your portfolio? What happens to the value of your portfolio if each yield to maturity rises by

one percentage point?

b. Rather than own a five-year bond and a fifteen-year

bond, suppose you sell both of them and invest in two

ten-year bonds. Each has a coupon rate of 8 percent

(semi-annual coupons) and has a yield to maturity of 9.20

percent. What is the value of your portfolio? What

happens to the value of your portfolio if the yield to

maturity on the bonds rises by one percentage point?

c. Based upon your answers to (a) and (b), evaluate the

price changes between the two portfolios. Were the price

changes the same? Why or why not?

Task 2:

Construct a spreadsheet to replicate the analysis of the table.

See below to view the table. That is, assume that $10,000 is

invested in a single asset that returns 7 percent annually for

twenty-five years and $2,000 is placed in five different

investments, earning returns of 100 percent, 0 percent, 5 percent,

10 percent, and 12 percent, respectively, over the twenty-year

time frame. For each of the questions below, begin with the

original scenario presented in the table:

a. Experiment with the return on the fifth asset. How low can the

return go and still have the diversified portfolio earn a higher

return than the single-asset portfolio?

b. What happens to the value of the diversified portfolio if the

first two investments are both a total loss?

c. Suppose the single-asset portfolio earns a return of 8 percent

annually. How does the return of the single-asset portfolio compare to that of the five-asset portfolio? How does it

compare if the single-asset portfolio earns a 6 percent annual


d. Assume that Asset 1 of the diversified portfolio remains a

total loss (–100% return) and asset two earns no return.

Make a table showing how sensitive the portfolio returns are

to a 1-percentage-point change in the return of each of the

other three assets. That is, how is the diversified portfolio’s

value affected if the return on asset three is 4 percent or 6

percent? If the return on asset four is 9 percent or 11

percent? If the return on asset five is 11 percent? 13 percent?

How does the total portfolio value change if each of the three

asset’s returns are one percentage point lower than in the

table? If they are one percentage point higher?

e. Using the sensitivity analysis of (c) and (d), explain how the

two portfolios differ in their sensitivity to different returns on

their assets. What are the implications of this for choosing

between a single asset portfolio and a diversified portfolio?

PLEASE SEE ATTACHED table below to complete task 2

Diversification Illustration (Invest $10,000 over 25 years)

Investment Strategy 1: All funds in one asset

Investment Strategy 2: Invest Equally in five different assets

Number of assets


Number of assets


Initial investment


Amount invested per asset


Number of years


Number of years


Annual asset return


5 asset returns (annual)

Total accumulation at the end of time frame: Total funds



Asset 1 return

Asset 2 return


Asset 3 return


Asset 4 return


Asset 5 return


Total accumulation at the end of time frame:

Asset 1


Asset 2


Asset 3


Asset 4


Asset 5


Total funds


Task 3:

Annual savings from Project X include a reduction of ten clerical

employees with annual salaries of $15,000 each, $8,000 from

reduced production delays, $12,000 from lost sales due to

inventory stock-outs, and $3,000 in reduced utility costs. Project

X costs $250,000 and will be depreciated over a five-year period

using straight-line depreciation. Incremental expenses of the

system include two new operators with annual salaries of $40,000

each and operating expenses of $12,000 per year. The firms’ tax

rate is 34 percent. a. Find Project X’s initial cash outlay.

b. Find the project’s operating cash flows over the five-year


c. If the project’s required return is 12 percent, should it be


PLEASE SEE ATTACHED FILE LABELED TASK 3 **must be completed in this file.

Submission Requirements:

Answer each problem in detail with a conclusion and results.

Submit your answer in a Microsoft Excel file, showing step-bystep solutions to all calculations.

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