Calculate the expected return of the portfolio

Question

Assignment

1. You have a portfolio of two branches, Branch A and Branch B and 75 percent of your total assets are invested in Branch A. The following information is given:

Expected return, E(RA) and E(RB)
Branch	A	B
Expected return	20%	12%

Covariance matrix
Branch	A	B
A	625	120
B	120	196

Note: σ²(R_A) = 625, 120 = Cov(R_A,R_B), σ²(R_B) = 196

A. Calculate the expected return of the portfolio.
B. Compute portfolio standard deviation of return.

2. Discuss the differences of balance sheets of commercial banks and nonfinancial firms.

3. What are the principal accounts that appear on a bank's balance sheet (Report of Condition)?

4. Discuss three main characteristics of banks' balance sheets.

5. What are core deposits and why are they so important as a funding source for commercial banks?

6. What factors influence the stock price of a financial-service corporation?

7. Suppose that a bank paying an annual dividend of $4 per share on its stock in the current period and dividends are expected to grow 5% a year every year, and the minimum required return-to-equity capital based on the bank's perceived level of risk is 10%. Can you estimate the current value of the bank's stock?

8. What is return on equity capital, and what aspect of performance is it supposed to measure? Can you see how this performance measure might be useful to the managers of financial firms?

9. UMB has the following balance sheet and income state information.

Assets		Liabilities and Equity
Cash	2,600	Deposits	13,800
Securities	7,000	Fed funds purchased and repos	1,584
Fed funds sold and reverse repos	87	Other borrowed funds	5
Loans	6,400	All other liabilities	91
Fixed assets	217	Common Stock	21
Other assets	339	Retained Earnings	1,142
Total assets	16,643	Total liabilities and equity	16,643

Selected items on income state (in millions)

Interest income	350
Interest expense	15
Provision for loan losses	18
Noninterest income	249
Noninterest expense	463
Taxes	24

(1) Calculate return on equity (ROE).
(2) Calculate return on assets (ROA).
(3) Calculate return on sales.

10. Suppose a bank reports that its net income for the current year is $51 million, its assets total $1,144 million, and its liabilities amount to $926 million. What is its return on equity capital? Is the ROE you have calculated good or bad? What information do you need to answer this last question?

11. U.S. Treasury bills are available for purchase this week at the following prices (based upon $100 par value) and with the indicated maturities:

a. $97.25, 182 days.
b. $95.75, 270 days.

Calculate the bank discount rate (DR) on each bill (a and b) if it is held to maturity. What is the equivalent yield to maturity (sometimes called the bond- equivalent or coupon-equivalent yield) on each of these Treasury Bills?

12. First National Bank of Bannerville has posted interest revenues of $63 million and interest costs from all of its borrowings of $42 million. If this bank possesses $700 million in total earning assets, what is First National's net interest margin? Suppose the bank's interest revenues and interest costs double, while its earning assets increase by 50 percent. What will happen to its net interest margin?

13. Commerce National Bank reports interest-sensitive assets of $870 million and interest-sensitive liabilities of $625 million during the coming month. Is the bank asset sensitive or liability sensitive? What is likely to happen to the bank's net interest margin if interest rates rise? If they fall?

14. A government bond is currently selling for $1,195 and pays $75 per year in interest for 14 years when it matures. If the redemption value of this bond is $1,000, what is its yield to maturity if purchased today for $1,195?

15. Florida bank has the following balance sheet:

Assets	Million $	Liabilities and Equity	Million $
Cash	$35	Demand deposits	$240
Short-term securities	$200	Interest-bearing transaction deposits	$260
Short-term loans	$225	Fed funds borrowings	$25
Long-term fixed-rate loans	$250	Long-term fixed-rate borrowings	$119
Total	$710	Equity	$66
		Total	$710

(1) Calculate the bank's one-year re-pricing gap.
(2) Measure the impact on net income when there is a 1 percent increase in rates.

16. Discuss shortcomings of re-pricing gap.

Format your assignment according to the following formatting requirements:

1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.

2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.

3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.