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Task 1:
a. You own a twobond 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 semiannually.
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 fiveyear bond and a fifteenyear
bond, suppose you sell both of them and invest in two
tenyear bonds. Each has a coupon rate of 8 percent
(semiannual 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
twentyfive 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 twentyyear
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 singleasset portfolio?
b. What happens to the value of the diversified portfolio if the
first two investments are both a total loss?
c. Suppose the singleasset portfolio earns a return of 8 percent
annually. How does the return of the singleasset portfolio compare to that of the fiveasset portfolio? How does it
compare if the singleasset portfolio earns a 6 percent annual
return?
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 1percentagepoint 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 
1 
Number of assets 
5 
Initial investment 
$10,000 
Amount invested per asset 
2000 
Number of years 
25 
Number of years 
25 
Annual asset return 
7% 
5 asset returns (annual) 

Total accumulation at the end of time frame: Total funds 
$54,274.33 
−100% 

Asset 1 return 

Asset 2 return 
0% 

Asset 3 return 
5% 

Asset 4 return 
10% 

Asset 5 return 
12% 

Total accumulation at the end of time frame: 

Asset 1 
$0.00 

Asset 2 
$2,000 

Asset 3 
$6,772.71 

Asset 4 
$21,669.41 

Asset 5 
$34,000.13 

Total funds 
$64,442.25 
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 stockouts, and $3,000 in reduced utility costs. Project
X costs $250,000 and will be depreciated over a fiveyear period
using straightline 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 fiveyear
period.
c. If the project’s required return is 12 percent, should it be
implemented?
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 stepbystep solutions to all calculations.
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