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Solved Financial Assignment: Your close friend is a primary school financial literacy teacher who believes that young students should be (Download Now)

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Solution Pages: 9

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Questions Covered in the Solution

1. Your close friend is a primary school financial literacy teacher who believes that young students should be exposed to basic principles of finance – the earlier, the better. He asks you for help in writing a half-page, in plain English without technical language, to explain why William Sharpe deserved the Nobel Prize

2. Explain why or why not covariance is the most important word in finance. One- hundred-word maximum.

3. Advice your 70-year old grandparents who will retire March 15, 2017, with a $1,500,000 (market value as of March 4, 2017) nest egg, 100% invested in the equity index since 1990, about using derivatives to lock in their gains.

4. I clearly recall my fellow doctoral students and I discussing, long ago, how to invest a major cash windfall (inheritance or winning the lottery). Everyone agreed that a diversified portfolio of municipal bonds was the perfect long-term plan. Critique that plan in terms of today’s financial market environment.

5. Is Fintech a passing fad?

6. You work for a smallish tech firm thinking about going public. The key managers, including you, are meeting to figure out how to value the business. One colleague, who has an MBA circa 1985, prepared an exhibit concluding that the applicable beta is 1.32 and the applicable equity risk premium is 5.5%. You are asked, with an MBA circa 2017, to critique those results. Do so, analytically but briefly.

7. Do Donaldson (Part 1, reading: New Framework for Debt Capacity) and Chapter 7 (Part 2, reading) agree about how to calculate debt capacity? Explain briefly, using High Country Seasonings as an example. Is debt capacity a resource to be maximized as plant capacity is a resource to be maximized?

8. Explain how Islamic Finance, if widely used, would/could have avoided the financial meltdown of 2007-08.

Sample of Solution

  1. Your close friend is a primary school financial literacy teacher who believes that young students should be exposed to basic principles of finance – the earlier, the better. He asks you for help in writing a half-page, in plain English without technical language, to explain why William Sharpe deserved the Nobel Prize.

The implications of finance entail all the participants of the economy, and the participants being active, passive, young or old are directly or indirectly affected by the financial negotiations. Whereas, the parties directly involved in such transactions also have to face tradeoffs while making such negotiations. William Sharpe, critically elucidated this tradeoff postulate, while relating the possible outputs of the tradeoffs through the mechanism of Capital Asset Pricing Model. Although, Sharpe’s theory didn’t receive attention at first, but it really had described complex mechanisms of financial markets. Sharpe determined the correlation between price and risk of a particular security. For more risky securities, the investors demand greater returns as compensation for their additional risks.

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  1. Explain why or why not covariance is the most important word in finance. One- hundred-word maximum.

Essentially, covariance determines the correlation between the returns of any two securities while also incorporating their specific risks of deviations through their Standard Deviations values. Covariance can be realized as the most important word in finance due to its extensive implications. For instance, the most critical issue in the financial markets is of risk, which is directly linked with diversification.

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  1. I clearly recall my fellow doctoral students and I discussing, long ago, how to invest a major cash windfall (inheritance or winning the lottery). Everyone agreed that a diversified portfolio of municipal bonds was the perfect long-term plan. Critique that plan in terms of today’s financial market environment.

Municipal bonds can offer different returns based on their risk exposures. For instance, general obligation bonds are least risky bonds which extend marginal returns, while revenue bonds are considered riskier and offer relatively greater returns. Whereas, there are also assessment bonds, which effectively obligate the repayments from the tax assessments within the municipality. Hence, it can be implied that although municipal bonds are least risky investments but they effectively can’t present substantial returns in the long run. In essence, sometime municipal bonds can’t even surpass the inflation rate (Gannon, 2010). Moreover, the intentions of today’s financial markets have also been changed and became more oriented towards equity securities rather than fixed income securities. While, the returns or the equity securities are also more significant than the fixed income securities, due to which individuals seek to invest in diversified equity portfolios.

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  1. Explain how Islamic Finance, if widely used, would/could have avoided the financial meltdown of 2007-08.

Islamic Finance, is as fast growing dimension of financial markets which is actually complied by Shari’a based on the jurisprudence derived from Qur’an and Hadith. The fundamental essence of Islamic Finance is to diminish the mechanisms of making money for just money. Eventually, it restricts transactions based purely on interest made in anticipation of self-oriented interests. Islamic Finance, realize money as just the medium of exchange with no intrinsic value of its own. Hence, the financial transactions in Islamic Finance are actually the organized trades which eventually consider money as just the medium rather than a commodity. Whereas, all the transactions must also be backed by real economy assets to effectively discourage the exacerbation of leverage. Hence, it can be concluded that with efficient utilization of Islamic Finance, the financial meltdown of 2007 could have been avoided which was actually an illusion of money created by leverage.

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