Financial Enterprise Risk Management by Paul Sweeting | 9780521111645 | 521111641 | Holooly

Financial Management

Financial Enterprise Risk Management

26 SOLVED PROBLEMS

Question: 16.1

You are managing a portfolio of equities for a pension scheme. The portfolio is actively managed with a benchmark of the FTSE All-Share Index, and its current value is £120 million. The scheme has decided it wishes to disinvest from this portfolio as quickly as possible, but selling all of the ...

Verified Answer:

Using Equation (16.8), the portfolio size, Y , is ...

Question: 15.1

You have two asset classes, 1 and 2. Asset class 1 has an expected return of 8% per annum with a standard deviation of 15%, whilst asset class 2 has an expected return of 5% with a standard devation of 6.5%. The correlation between the asset classes is –20%. Find the expected risk and return for a ...

Verified Answer:

The expected return for this portfolio is:

...

Question: 14.11

Considering the case in Example 14.9.2 and assuming a loss ratio of 80%, what are the total estimated claims for 2008 and 2009 under the Bornhuetter–Ferguson approach? ...

Verified Answer:

The link ratios

l_{1,2}

and

...

Question: 14.9

The table below gives the history of claims occurring in the last three years. All claims are notified no more than three years after happening: What are the total estimated claims for 2007, 2008 and 2009 under the total loss ratio approach, assuming a total loss ratio of 80%? ...

Verified Answer:

The loss ratio of 80% is consistent with that obse...

Question: 14.10

Considering the case in Example 14.9.2, what are the total estimated claims for 2008 and 2009 under the chain ladder approach? ...

Verified Answer:

Each cell,

X_{c,d}

, contains the n...

Question: 14.7

The firm X has a total asset value of £500m, whilst the firm Y has a total asset value of £800m. The expected rate of growth of X’s asset value is 10% per annum, whilst its volatility is 30% per annum. For Y, the expected rate of growth is 5% per annum with a volatility of 10% per annum. The ...

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Merton’s model gives the probability of default at...

Question: 14.6

A firm has a bond in issue that has a Standard and Poor’s credit rating of BBB. The projected values of the bond, allowing for changes in gross redemption yield and, when relevant, default and recovery, are given below for each credit rating. Using a credit migration approach based on Standard and ...

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Using the process outline above, an additional col...

Question: 14.5

A firm has Standard and Poor’s credit rating of A. Using the credit migration rates averaged over 1981 to 2009, what is the probability that the firm will have defaulted in two years time? What is the answer using an N times one-year approximation? How do these results compare to the actual two- ...

Verified Answer:

The firm has a 0.08% chance of defaulting before t...

Question: 14.4

A firm has a total asset value of 500. The expected rate of growth of this asset value is 10% per annum, whilst its volatility is 30% per annum. If the firm’s total borrowing consists of a fixed repayment of 300 that must be made in exactly one year’s time, what is the probability that the firm ...

Verified Answer:

Merton’s model gives the probability of default at...

Question: 14.3

Determine the first five principal components for the UK forward rate curve using daily forward rates of interest from the end of 1999 to the end of 2009 as provided by the Bank of England. Verify the results by considering the correlations between the excess returns for the various forward rates. ...

Verified Answer:

Recall from Chapter 11 that each principal compone...

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