# Answers: Risk Aversion and Security

1269 words 6 pages
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Assignment 7
The due date for this quiz is Mon 26 Aug 2013 6:00 AM PDT (UTC -0700).
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Please read all questions and instructions carefully. Note that you only need to enter answers in terms of numbers and without any symbols (including \$, %, commas, etc.). Enter all dollars without decimals and all interest rates in percentage with up to two decimals. Read the syllabus for examples.The points for each question are listed in parentheses at the start of the question, and the total points for the entire assignment adds up to 100. This assignment covers Statistics as related to finance. Refer to Note on Review of Statistics before you

Assume, for convenience, that all three securities do not pay dividends. Alpha, Current Price 40; Current Weight 80%; Next Year's Price: Expansion 48, Normal 44, Recession 36; Beta, Current Price 27.50; Current Weight 20%; Next Year's Price: Expansion 27.50, Normal 26, Recession 25; Gamma, Current Price 15; Current Weight 0%; Next Year's Price: Expansion 16.50, Normal 19.50, Recession 12.
It depends.
No.
Yes.
Question 10
(15 points) Suppose there are two mortgage bankers. Banker 1 has two \$1,000,000 mortgages to sell. The borrowers live on opposite sides of the country and face an independent probability of default of 5%, with the banker able to salvage 40% of the mortgage value in case of default. Banker 2 also has two \$1,000,000 mortgages to sell, but Banker 2's borrowers live on the same street, have the same job security and income. Put differently, the fates and thus solvency of Banker 2's borrowers move in lock step. They have a probability of defaulting of 5%, with the banker able to salvage 40% of the mortgage value in case of default. Both Bankers plan to sell their respective mortgages as a bundle in a mortgage-backed security (MBS) (i.e., as a portfolio). Which of the following is correct?
Banker 2's MBS has a higher expected return and more risk.
Banker 1's MBS has a higher expected return and less risk.
Banker 1's MBS has a higher expected return and more risk.
Banker 2's MBS has more risk, but the expected

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