Finance Assignment: Risk Management, Portfolio Analysis, and Decisions

This finance assignment delves into various aspects of portfolio management and financial decision-making. It begins by analyzing the least risky combination of two assets and calculating the risk of a new portfolio. The assignment then examines a real-world scenario involving Tesco's share price fall, exploring the reasons behind the decline, the CEO's decisions, and the market's reaction. Further analysis includes calculating the price and yield to maturity of a Treasury bill, determining the Macaulay duration of a portfolio composed of different securities, and recommending the optimal composition for a 3-year investment horizon. The assignment also uses Excel Solver to achieve a specific portfolio Macaulay duration, discusses the implications of default risk, and assesses the new value of the portfolio under altered conditions. The solution provides detailed calculations, interpretations, and recommendations, supported by relevant references.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Q1.a) Depicting the least risky combination of these two assets:..............................................2
Q1.b) Depicting the risk of the new portfolio:...........................................................................2
Q2.a) Depicting why Tesco’s prices falls:.................................................................................3
Q2.b) Depicting the decision taken by CEO of Tesco:..............................................................3
Q2.c) Depicting the reaction of the 2004 Tesco share fall:........................................................4
Q3. Depicting the price of Treasury bill:...................................................................................5
Q4.a) Depicting the yield to maturity for the T-Bill:.................................................................5
Q4.b) Calculating the Macaulay duration of securities duration of the portfolio:.....................5
Q4.c) Depicting the recommendation for the composition of the portfolio:..............................6
Q4.d) Using excel solver for obtaining portfolio Macaulay duration of 3.25 years:.................6
Q4.e) Depicting whether default risk is major concern for the company:.................................7
Q4.f) Depicting new value of the portfolio:..............................................................................7
Reference and Bibliography:......................................................................................................9

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Q1.a) Depicting the least risky combination of these two assets:
Stock A Stock B Mean Variance Stedv
0% 100% 11.00% 1.96% 14.00%
10% 90% 11.30% 1.78% 13.34%
20% 80% 11.60% 1.67% 12.91%
30% 70% 11.90% 1.62% 12.74%
40% 60% 12.20% 1.65% 12.83%
50% 50% 12.50% 1.74% 13.19%
60% 40% 12.80% 1.90% 13.80%
70% 30% 13.10% 2.13% 14.61%
80% 20% 13.40% 2.43% 15.60%
90% 10% 13.70% 2.80% 16.74%
100% 0% 14.00% 3.24% 18.00%
The investment of 30% in Stock A and 70% in Stock B can give the least standard
deviation.
Q1.b) Depicting the risk of the new portfolio:
Particulars Weight Returns
Stock A 24% 14%

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Stock B 56% 11%
Risk free return 20% 2.5%
Portfolio returns 10.02%
Q2.a) Depicting why Tesco’s prices falls:
The overall Tesco’s prices fell due to the overstated profits depicted in the revenue
recognition irregularities of the company. This mainly indicates that the company overstated
its profits in the financial report for generating higher returns from investment. The overall
manipulations of the financial report of Tesco resulted in a sharp decline and its share price,
as the company did not match the Expectations of the overall shareholders. Furthermore, the
annual drop of profits in two decades of the company has been wiped out around 10 billion
pounds in market value. The relevant decline in market value was mainly instigated by the
declining profits obtained by the organisation (Addison 2017). Moreover, the misstatement
conducted in the annual report of Tesco mainly indicated Falsifying Information Theory,
which was used by the organisation to inflate their annual report. This theory mainly
indicates that relevant falsification of the annual report is been conducted, which is directly
affecting financial stability of the organisation.
Q2.b) Depicting the decision taken by CEO of Tesco:
The CEO of Tesco mainly portrayed all the relevant information about the income
misstatement, which directly reflected on the share price of the company. No the decision that
was made by the management should not be withheld, as it would directly instigate that the

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CEO has collaborated with the misstatement. This is why the decision that was made by the
CEO was correct and appropriate in accordance with the law. Furthermore, the main aim of
the CEO is not to generate higher returns of maximize share value of the organisation. Instead
the main aim of the CEO is to keep the ethical balance in its company and the operations.
Therefore, the decision that was made by CEO of Tesco for disclosing all the relevant
irregularities in the financial accounting was adequate ethical in nature (Gitman, Juchau and
Flanagan 2015).
Q2.c) Depicting the reaction of the 2004 Tesco share fall:
Particulars Value
Tesco share price 2004 Dec 321.75
Tesco share price 2014 173.6
Loss of income -46.05%
The above table mainly indicates the overall drastic decline in share price which was
seen in 2014 could have petrified the investors that have invested in 2004 on the shares of
Tesco. The overall income or capital will mainly amount to -46.05%, which is directly huge
amount of loss that could be finished by the shareholders. Furthermore, if the situation could
have stated then the reaction for The Fall of shares in Tesco would be drastic, as maximum of
the well that is 46% would be deducted from this fall. Portfolio comprising of Tesco stocks in
2014 would have yield negative returns and eventually increase the overall risk of portfolio
by declining and mitigating all the returns that has been generated in 10 years. Hence, the
decline in share price of Tesco would have created a panic among shareholders (Damodaran
2016).

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Q3. Depicting the price of Treasury bill:
Particulars Value
Face value £ 1,000,000
Discount rate 6.75%
Time to maturity 69
Current price £ 987,728
Q4.a) Depicting the yield to maturity for the T-Bill:
Security yield Face value Market value
US treasury Bill $ 40,000.00 $ 38,384.00
Yield to maturity of T-Bill 4.12%
Q4.b) Calculating the Macaulay duration of securities duration of the portfolio:
Particulars US treasury
Bill
Corporate
Bond rate Aa
Corporate
Bond rate B
Corporate Bond
rate Baa
Coupon 0 $ 13,500.00 $ 27,000.00 $ 11,250.00
N 1 8 10 5
Y 0 12.14% 16.17% 13.28%
P $ 38,384.00 $ 120,718.42 $ 179,937.80 $ 79,506.40

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M $ 40,000.00 $ 135,000.00 $ 225,000.00 $ 75,000.00
Macaulay duration of
each of the securities 1.04 3.94 3.13 2.91
Macaulay duration of portfolio 3.08
Q4.c) Depicting the recommendation for the composition of the portfolio:
Investments for the time horizon of 3 years mainly indicate that the investor is
conducting for a short term investment. This relevant short term Investments needs to be
conducted on equity or short term Treasury bill. This relevant short term treasury bill of 3
years could eventually help in generating the adequate return from investments in 3 years.
Furthermore, there be a fixed return from the investments and no capital loss will be
conducted (Silva, Neves and Horta 2015). The portfolio must contain maximum of treasury
bills for 3 years and corporate bonds with rating Aa.
Q4.d) Using excel solver for obtaining portfolio Macaulay duration of 3.25 years:
Particulars US treasury
Bill
Corporate
Bond rate Aa
Corporate
Bond rate B
Corporate Bond
rate Baa
Coupon 0 $ 13,500.00 $ 27,000.00 $ 11,250.00
N 1 8 10 5
Y 0 10.29% 12.01% 12.67%
P $ 238,384.00 $ 160,718.42 $ 179,937.80 $ 79,506.40
M $ 40,000.00 $ 135,000.00 $ 225,000.00 $ 75,000.00

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Macaulay duration of
each of the securities 0.17 3.38 4.50 2.99
Macaulay duration of portfolio 3.50
Q4.e) Depicting whether default risk is major concern for the company:
There is a chance of default risk, as corporate Bond Investments are been conducted
in the portfolio. This mainly indicates that portfolio has an exposure of Corporate bonds,
which needs to be paid by companies. Therefore, there is a chance for the default risk to
increase if the organisation or not able to pay the debt in time. Corporate Bond rated at Baa is
mainly a low grade Bond, repayments conducted on time can be questionable and directly
increase the default risk (Friewald, Wagner and Zechner 2014).
Q4.f) Depicting new value of the portfolio:
Particulars US treasury
Bill
Corporate
Bond rate Aa
Corporate
Bond rate B
Corporate
Bond rate Baa
Coupon 0 $ 13,500.00 $ 27,000.00 $ 11,250.00
N 1 8 10 5
Y 0 12.34% 16.37% 13.55%
P $ 38,384.00 $ 120,718.42 $ 179,937.80 $ 79,506.40
M $ 40,000.00 $ 135,000.00 $ 225,000.00 $ 75,000.00
Macaulay duration of