Investment Portfolios

  1. Which components of operating expenses experience the greatest fluctuations? Why?
  • Why do equity holders care more about ROE than about ROA?
  • If a bank is falling short of meeting its capital requirements by $1 million, what three things can it do to rectify the situation?
  • Angus Bank holds no excess reserves but complies with the reserve requirement. The required reserves ratio is 9%, and reserves are currently $27 million. Determine the amount of deposits, the reserve shortage created by a deposit outflow of $5 million, and the cost of the reserve shortage if Angus Bank borrows in the federal funds market (assume the federal funds rate is 0.25%).
  • Nice Horizon Bank has the following measures of bank profitability: EM = 14 and ROA = 1.05%. Gold Coast Bank’s measures are EM = 12.3 and ROA = 1.15%.Which bank has a higher ROE?
  • Refer to the previous problem. Calculate both banks’ net profit after taxes and equity capital if both banks’ assets are equal to $120 million.
  • A bank is considering two investment portfolios com- posed of a mix of government securities (federal and municipal securities). The first portfolio has a return of 6% with probability 0.9 and returns of 5% and 7% with 0.05 probability. The second portfolio has a return of 5% with probability 0.5 and a return of 7% with probability 0.5. Which portfolio has the best combination of return and risk?

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