ECON 7780 Economic and Financial Risk Management for Financial Institutions
Assignment 1
Due Date: 2 March, 2021
*Submission: Moodle Turnitin

Following questions are adopted from Risk management and financial institutions, J. Hull
(2018):

Chapter 1, Practice Questions and Problems
Q1.1: An investment has probabilities 0.1, 0.2, 0.35, 0.25, and 0.1 of giving returns equal to
40%, 30%, 15%, -5% and -15%. What are the expected returns and the standard deviation of
the returns?
Q1.2: Suppose that there are two investments with the same probability distribution of return
as in Q1.1. The correlation between the returns is 0.15. What is the expected return and the
standards deviation of return from a portfolio where money id divided 1/3 and 2/3 between
the investment?
Q1.4: What is the difference between systematic and non-systematic risk? Which is more
important to an equity investor? Which can lead to the bankruptcy of a corporation.
Q1.11: A bank’s profit next year will be normally distributed with a mean of 0.6% of assets and
a standard deviation of 1.5% of assets. The bank’s equity is 4% of assets. What is the probability
that the bank will have a positive equity at the end of the year? Ignore taxes.
Q1.18: A portfolio manager has maintained an actively managed portfolio with a beta of 0.2.
During the last year, the risk-free rate was 5% and major equity indices performed very badly,
providing returns of about -30%. The portfolio manager produced a return of -10% and claims
that in the circumstances it was good. Discuss this claim.

What is the present value of a 10-year bond with a \$100 face value, which pays a 6% coupon
annually? Use an 8% annual discount rate. 