Finance-related content

Expected return and standard deviation of Heat are 3.45% and 0.058 respectively

Thus, expected return and standard deviation of Heat are 3.45% and 0.058, i.e. 5.78% respectively.

Earlier written already given at 10.20%

And return now is the new project of 3.45%.

Thus, covariance and correlation between the returns of Alpha and Gamma are -26.82 and -0.98 respectively.

Systematic risk can be defined as risk that is associated with the border market context and it is not feasible for an organization to regulate it. On the contrary, systematic risks are specific to a particular industry or market. For rational investors, systematic risk is not relevant in nature; owing to the fact that the organization is not capable enough of inculcating any strategic action to mitigate the negative consequences emerging from a systematic risk. On the other hand, for unsystematic risk, an organization could potentially incorporate several measures to safeguard its business interest. 

In the capital market line, investors who are characterized as risk-averse would generally look for securities that have stabilized return patterns. To put it in simple perspective it can be stated that whenever government securities or government backed securities are involved or large cap stocks which have given stabilized return over a period of time are generally preferred by risk averse investors. On the contrary, for risk tolerant investors, equities which are prone to high risk high reward features are more lucrative in nature. Due to the fact that these securities could potentially consolidate the financial integrity of risk tolerant investors in comparison to risk-averse investor who primarily focuses on safeguarding the portfolio.  

Price of bond Y (1000 x 0.540269) = $540.27

According to the liquidity preference theory the reflection of higher rate which is demanded by the investors in the long run is term structure of interest rate. Thus, the preference theory of liquidity clearly implies that the investors require higher compensation for long term investment in the form of greater rate of return on investment. Hence; the normal yield curve slope upward despite the future interest rate expected to remain flat.

a) The monetary policy that is determined by the Federal Reserve of the United States is oriented towards promoting employment at its full potential. The fundamental reason behind this is that once employment is consolidated across the nation, the probability of the national economy to be emboldened in a convenient and swift manner increases simultaneously. One of the noticeable features in this particular instance is that the monetary policy is always oriented to maintain a moderate long term interest rate. In view of the fact that businesses across the United States can only prosper once the interest rates are favorable for small scale and medium scale business enterprise.

Calculation of the expected return and yield to maturity of a bond

b) The three tools of the US monetary policy can be referred to as the discount rate, reserve requirement as well as open market operations. All of these tools are jointly called the federal policy toolkit. The fundamental objective of implementing these three tools is to regulate the monetary policy that governs the US economy.  

 -Reserve Requirement: According to the Federal Reserve Act, 1913, depository institutions that are operational across the US are required to deposit a substantial amount of threshold reserve from their respective deposit to the Federal Reserve. Since, this institution generally has a registered account with the Federal Reserve, monetary policy dictates them to deposit a percentage of their capital to the Federal Reserve.

- The discount rate: This is an interest rate that is charged by the Federal Reserve for financial institutions. The discount window often acts as a backup source for financing depository institutions; so that during the course of unusual market circumstances, the depository institution could carry on the regular operation.

- Open market operation: This is one of the most common tools utilized by the Federal Reserve where government securities are bought and sold by the Federal Reserve in the open market.

c) The monetary policy transmission can be defined as the channels with the help of which amendments are incorporated in the US economy regarding various monetary policy rates. This in turn impacts the behaviour of diverse economic variables. To put it in simple perspective, it can be stated that the decisions that are primarily formulated by the Federal Reserve are gradually incorporated into the national economy of the US with the help of several channels. Owing to the fact that these channels should in turn regulate the rate of inflation as well as interest rate. The long term influence of the channel is reflected in the demand of overall services and goods across the US. There are several mechanisms through which the monetary policy is then duly inculcated in the US economy. The first one being maintaining reserve for every depository institutions, followed by the policies to regulate the discount rate and selling or purchasing US government securities or government backed securities in the open market.

Once the interest rate is regulated in an appropriate manner, the probability of business to flourish seamlessly without an impediment takes place. However, if appropriate actions are not initiated in terms of regulating the monetary policy and the interest rate is subjected to increase vehemently; it would not only impede the growth of business, but also act as an impediment for the ongoing business to carry their respective corporation seamlessly. As a consequence of that the overall national economy would be jeopardized. In order to prevent such circumstances, the Federal Reserve will always systematically design the monetary policy to ensure that all of the negative aspects of the national economy should be addressed simultaneously.

From an apparent vision it would seem that the stability of price is only a one sided economic move. However, the economic significance of stabilizing the price is attributed with gradual rise in employment, which in turn helps the national economy of the US to be consolidated eventually. In other words, with the help of a mechanism of transmission, the monetary policies are capable enough to stimulate the economic prosperity of the US. All in all it can be stated that once the monetary policies are newly implemented, with the help of transmission mechanism; the rate of inflation along with price of services or product are regulated by the Federal Reserve in such a manner, that in turn reflects the economic growth of the nation.