TUGAS MANAJEMEN KEUANGAN

Nama Kelompok : Indah Saputri 01012682327030

: Melida Sari 01012682327033
: Siti Meirini 01012682327025
Kelas : Reguler – 55B
Mata Kuliah : Manajemen Keuangan
Dosen : Prof. Drs. H. Isnuhardi, M.B.A., Ph.D
1. The Fisher equation tells us that the real interest rate approximately equals the
nominal rate minus the inflation rate. Suppose the inflation rate increases from 3% to
5%. Does the Fisher equation imply that this increase will result in a fall in the real
rate of interest? Explain.
Answer :
In reference to the Fisher equation, it predicts that the nominal rate will equal the
equilibrium real rate plus the expected inflation rate, for this reason therefore, if the
inflation rate increases from 3% to 5% while there is no change in the real rate, then
the nominal rate will increase by 2%.
On the other hand, the equation predicts that it is possible that an increase in the
expected inflation rate would be accompanied by a change in the real rate of interest.
While it is conceivable that the nominal interest rate could remain constant as the
inflation rate increased, this means that the real rate decreased as inflation increased,
this is not a likely scenario.

2. You’ve just stumbled on a new dataset that enables you to compute historical rates of
return on U.S. stocks all the way back to 1880. What are the advantages and
disadvantages in using these data to help estimate the expected rate of return on U.S.
stocks over the coming year?
Answer:
If we assume that the distribution of returns remains reasonably stable over the entire
history, then a longer sample period (i.e., a larger sample) increases the precision of
the estimate of the expected rate of return; this is a consequence of the fact that the
standard error decreases as the sample size increases. However, if we assume that the
mean of the distribution of returns is changing over time but we are not in a position
 to determine the nature of this change, then the expected return must be estimated
from a more recent part of the historical period. In this scenario, we must determine
how far back, historically, to go in selecting the relevant sample. Here, it is likely to
be disadvantageous to use the entire data set back to 1880.

3. You are considering two alternative 2-year investments: You can invest in a risky
asset with a positive risk premium and returns in each of the 2 years that will be
identically distributed and uncorrelated, or you can invest in the risky asset for only 1
year and then invest the proceeds in a risk-free asset. Which of the following
statements about the first investment alternative (compared with the second) are true?
a. Its 2-year risk premium is the same as the second alternative.
b. The standard deviation of its 2-year return is the same.
c. Its annualized standard deviation is lower.
d. Its Sharpe ratio is higher.
e. It is relatively more attractive to investors who have lower degrees of risk
aversion.

Answer :

The first investment alternative has a different risk premium and higher Sharpe ratio
compared to the second alternative. The annualized standard deviation of the first
investment alternative is lower. The first investment alternative is relatively more
attractive to investors with higher degrees of risk aversion.

Explanation:

Let's compare the two investment alternatives:

a. The 2-year risk premium of the first alternative is not the same as the second
alternative. The risk premium is the difference between the expected return on
the risky asset and the risk-free rate. In the second alternative, the risk
premium for the first year is earned, and then the proceeds are invested in the
risk-free asset for the second year.
b. The standard deviation of the 2-year return is not the same for both
alternatives. The first investment alternative involves investing in a risky asset
with returns that are identically distributed and uncorrelated. This introduces
additional risk compared to the second alternative.
 c. The annualized standard deviation of the first investment alternative is lower
than the second alternative. This is because the risk is spread over two years,
while in the second alternative, the risk is concentrated in the first year only.
d. The Sharpe ratio of the first investment alternative is higher than the second
alternative. The Sharpe ratio measures the excess return earned per unit of
risk, and since the first alternative has a lower annualized standard deviation,
its Sharpe ratio is higher.
e. The first investment alternative is relatively more attractive to investors who
have higher degrees of risk aversion. This is because the risk in the first
alternative is spread over two years, while in the second alternative, the risk is
concentrated in the first year only.

4. You have $5,000 to invest for the next year and are considering three alternatives:
a. A money market fund with an average maturity of 30 days offering a current
yield of 6% per year.
b. A 1-year savings deposit at a bank offering an interest rate of 7.5%.
c. A 20-year U.S. Treasury bond offering a yield to maturity of 9% per year.
What role does your forecast of future interest rates play in your decisions?
Answer :
Please note that the money market fund provides 6% p.a. yield & your return for the
next year would depends on 30 days interest rates every month when the fund rolls
over maturing securities. However the one-year savings deposit offers a 7.5% return
for the year. If you forecast that the rate on money market instruments will increase
significantly above the current 6% yield, then the money market fund might result in a
higher holding period return than savings deposit.
Further the 20-year Treasury bond offers a yield to maturity of 9% per year, which is
1.5% higher than the rate on the one-year savings deposit, however, if long-term
interest rates increase during the year, you could earn less than 7.5% on the bond . If
Treasury bond yields rise above 9%, then the price of the bond will fall, and the
resulting capital loss will wipe out some or all of the 9% return you would have
earned if bond yields had remained unchanged over the course of the year.
5. Use Figure 5.1 in the text to analyze the effect of the following on the level of real
interest rates:
a. Businesses become more pessimistic about future demand for their products
and decide to reduce their capital spending.
b. Households are induced to save more because of increased uncertainty about
their future Social Security benefits.
c. The Federal Reserve Board undertakes open-market purchases of U.S.
Treasury securities in order to increase the supply of money.

Answer :

Open market purchases of U.S. Treasury securities by the Federal Reserve Board are
equivalent to an increase in the supply of funds (a shift of the supply curve to the
right). The Federal Reserve buys treasuries with cash from its own account or it issues
certificates which trade like cash. As a result, there is an increase in the money supply,
and the equilibrium real rate of interest will fall.

6. You are considering the choice between investing $50,000 in a conventional 1-year
bank CD offering an interest rate of 5% and a 1-year “Inflation-Plus” CD offering
1.5% per year plus the rate of inflation.
a. Which is the safer investment?
b. Which offers the higher expected return?
c. If you expect the rate of inflation to be 3% over the next year, which is the
better investment? Why?
d. If we observe a risk-free nominal interest rate of 5% per year and a risk-free
real rate of 1.5% on inflation-indexed bonds, can we infer that the market’s
expected rate of inflation is 3.5% per year?

Answer :

a. The "Inflation-Plus" CD is the safer investment because it guarantees the

purchasing power of the investment. Using the approximation that the real rate
equals the nominal rate minus the inflation rate, the CD provides a real rate of
1.5% regardless of the inflation rate.
b. The expected return depends on the expected rate of inflation over the next
year. If the expected rate of inflation is less than 3.5% then the conventional
 CD offers a higher real return than the inflation-plus CD; if the expected rate
of inflation is greater than 3.5%, then the opposite is true.
c. If you expect the rate of inflation to be 3% over the next year, then the
conventional CD offers you an expected real rate of return of 2%, which is
0.5% higher than the real rate on the inflation-protected CD. But unless you
know that inflation will be 3% with certainty, the conventional CD is also
riskier. The question of which is the better investment then depends on your
attitude towards risk versus return. You might choose to diversify and invest
part of your funds in each.
d. No. We cannot assume that the entire difference between the risk-free nominal
rate (on conventional CDs) of 5% and the real risk-free rate (on inflation-
protected CDs) of 1.5% is the expected rate of inflation. Part of the difference
is probably a risk premium associated with the uncertainty surrounding the real
rate of return on the conventional CDs. This implies that the expected rate of
inflation is less than 3.5% per year.
7. Suppose your expectations regarding the stock price are as follows:
State of the Market Probability Ending Price HPR(including dividends)
Boom .35 $140 44.5%
Normal growth .30 110 14.0
Recession .35 80 -16.5
Answer:

Mean: E(r) = [0.35 × 44.5%] + [0.30 × 14.0%] + [0.35 × (-16.5%)] = 14%

Standard deviation:
σ 2 = [0.35 × (44.5% - 14%)2] + [0.30 × (14% - 14%)2] + [0.35 × (-16.5% - 14%)2]
= 651.175
σ = 25.52%
8. Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasury bond
with an
8% coupon if it is currently selling at par and the probability distribution of its yield to
maturity
a year from now is as follows:
 State of the Economy Probability YTM
Boom .20 11.0%
Normal growth .50 8.0
Recession .30 7.0

For simplicity, assume the entire 8% coupon is paid at the end of the year rather than
every 6 months.

Answer:
Probability distribution of price and one-year holding period return for a 30-year U.S.
Treasury bond (which will have 29 years to maturity at year’s end):
Economy Probability YTM Price Capital Gain CouponInterest HPR
Boom 0.20 11.0% $74.05 $25.95 $8.00 17.95%
Normal 0.50 8.0% $100.00 $0.00 $8.00 8.00%
Growth
Recession 0.30 7.0% $112.28 $12.28 $8.00 20.28%

9. What is the standard deviation of a random variable q with the following probability
distribution:
Value of q Probability
0 .25
1 .25
2 .50
Answer:
E(q) = (0*0.25) + (1*0.25) + (2*0.25) = 1.25
σ2 = (0.25∗(0 − 1.25)² + 0.25∗(1 − 1.25)² + 0.5∗(2 − 1.25)² ) = 0.6875
σ = √ 0.6875 = 0.8292

10. The continuously compounded annual return on a stock is normally distributed with a
mean of 20% and standard deviation of 30%. With 95.44% confidence, we should
expect its actual return in any particular year to be between which pair of values?
Hint: Look again at Figure 5.4 .
a. 2 40.0% and 80.0%
b. 2 30.0% and 80.0%
c. 2 20.6% and 60.6%
d. 2 10.4% and 50.4%

Answer:
 Empirical rule defines the relation between the range of mean and movement of
actualvariables expected and standard deviation.
The following are the difference range of actual variable movements under various
Confidence levels:
If the actual variable movement range is (68% - 95%), then the confidence level is
[Mean± Standard deviation].
If the actual variable movement range is (95% - 99.7%), then the confidence level is
[Mean ± ( 2x Standard deviation)].
If the actual variable movement range is (Above99.7%), then the confidence level
is[Mean ± ( 3 x Standard deviation)]
Stock mean is 20% and standard deviation is 30%. With 95.44% confidence find
theexpected actual return in any particular year.
Calculate the confidence Interval levels as follows:Since, the returns are normally
distributed and expects with 95.44% confidence level theactual return will be under
two standard deviation case from the mean.
Hence, at 95.44% confidence, the interval level is calculated below:Cofidence interval
level = 20% - (2 x 30%) = -40% To Cofidence interval level = 20% + (2 x 30%) =
80%Therefore, the confidence interval level is -40% to 80%. Hence, Option A is
correct.

11. Using historical risk premiums over the 7/1926-9/2012 period as your guide, what
would be your estimate of the expected annual HPR on the Big/value portofolio if the
current risk-free interest rate 3% ?

To estimate the expected annual holding period return (HPR) on the Big/Value
portfolio, we can use the historical risk premiums as a guide. The historical risk
premium is the difference between the historical average return on the stock market
and the risk-free rate. Assuming you have access to historical data on the stock market
returns and the risk-free rate for the period 7/1926–9/2012, you can calculate the
historical risk premium.

Let's say the historical average return on the stock market over this period was 10%
and the risk-free rate was 3%. Then, the historical risk premium would be 10% - 3% =
7%.

Now, to estimate the expected annual HPR on the Big/Value portfolio, you would add
this historical risk premium to the current risk-free rate. If the current risk-free rate is
3%, then the expected annual HPR on the Big/Value portfolio would be:

Expected HPR = Current risk-free rate + Historical risk premium

= 3% + 7%
= 10%
 So, based on the historical risk premiums over the specified period and a current risk-
free rate of 3%, the estimated expected annual HPR on the Big/Value portfolio would
be 10%.

12. Visit Professor Kenneth French’s data library website: http://mba.tuck.dartmouth.edu/

pages/faculty/ken.french/data_library.html and download the monthly returns of “6
port-folios formed on size and book-to-market (2 3 3).” Choose the value-weighted
series for the period from 1/1928–12/2012 (1,020 months). Split the sample in half
and compute the aver-age, SD, skew, and kurtosis for each of the six portfolios for the
two halves. Do the six split-halves statistics suggest to you that returns come from the
same distribution over the entire period?

13. During a period of severe inflation, a bond offered a nominal HPR of 80 percent per
year. The inflation rate was 70 percent per year.

a. What was the real HPR on the bond over the year?

Answer: Let r denote the nominal return on the bond and let i denote the inflation rate.
Then the real HPR is given by 1 + r 1 + i − 1 = 1.80 1.70 − 1 = 5.88% .

b. Compare this real HPR to the approximation R = r − i.

Answer: With the approximation, we get

R = r − i = 80% − 70% = 10%.

Clearly, R = r − i is not a good approximation for large values of r and i. Use Table 1
to answer problems 9 through 11.

Bear Market Normal Market Bull Market

Probability 0.2 0.5 0.3

Stock X −20% 18% 50%

Stock Y −15% 20% 10%

Table 1: Table for problems 9 through 11.

14. Suppose that the inflation rate is expected to be 3% in the near future. Using the
historical data provided in this chapter, what would be your predictions for:
a. The T-bill rate?
T-bills: 0.46% real rate + 3% inflation = 3.46%
b. The expected rate of return on large stocks?
 Expected return on large stocks: 3.46% T-bill rate + 11.69% historical risk premium =
15.15%
c. The risk premium on the stock market?
The risk premium on stocks remains unchanged. A premium, the difference between
two rates, is a real value, unaffected by inflation.

15. An economy is making a rapid recovery from steep recession, and businesses foresee a
need for large amounts of capital investment. Why would this development affect real
interest rates?
Real interest rates would be expected to rise as the demand for funds increased.