Case 2: Financial Management

CASE 2

1) Treasury Bonds are bonds issued by the federal government and can be referred to as T-bond or government bond. T-Bonds do not depend on the economic situation because they are issued by the government as investors become certain to receive returns at the promised rate. Besides, the treasury will redeem bills at the par regardless of the state of the economy and government can increase money printing to keep a balance or prevent loss. Since T-bonds are issued by federal government, considering the risk of the bond is much lower over a short period of time compared to a long period. “the longer the term, the more sensitive to fluctuation of interest rates.” Therefore, the return on a 1-year T-bond is more likely to be risk free and are guaranteed by the US government.

2)

| Calculation | Expected Return |

1-Year T-bond | (0.1*8%)+(0.2*8%)+(0.4*8%)+(0.2*8%)+(0.1*8%) | 8% |

TECO | (0.1*- 8%)+(0.2*2%)+(0.4*14%)+(0.2*25%)+(0.1*33%) | 13.5% |

Gold Hill | (0.1*18%)+(0.2*23%)+(0.4*7%)+(0.2*-3%)+(0.1*2%) | 8.8% |

S&P 500 fund | (0.1*-15%)+(0.2*0%)+(0.4*15%)+(0.2*30%)+(0.1*45%) | 15% |

In short, S&P 500 fund is considered the best since it has a higher expected return compared to the rest.

3) Standard Deviation:

T-bond → [0.18-82+0.28-82+0.48-8 2+0.28-82+0.18-82]

= 0%

TECO → [0.113.5--82+0.22-13.52+0.414-13.5 2+0.225-13.52+ 0.133-13.52]

= 11.7%

Gold Hill → [0.118-8.82+0.223-8.82+0.47-8.8 2+0.2-3-8.82+ 0.12-8.82]

= 9.1%

S&P 500 Fund → [0.1-15-152+0.20-152+0.415-15 2+0.230-152+ 0.145-152]

= 16.4%

Coefficient of Variation

A. T-bond → 0/8 = 0

B. TECO → 11.7/13.5 = 0.87

C. Gold Hill → 9.1/8.8 = 1.03

D. S&P 500 Fund → 16.4/15 =...