A company has three investments, each being independent of the other. with correlation coefficients between them of 0.0.
• Asset A: $100,000; 1-year Probability of Default: 15%; Expected recovery upon default: $80,000; Yield of 10%.
• Asset B: $200,000; 1-year Probability of Default: 17.5%; Expected recovery upon default: $150,000; Yield of 12%.
• Asset C: $150,000; 1-year Probability of Default: 20.0%; Expected recovery upon default: $25,000; Yield of 15%.
What is the 1-year expected return/loss in$ and in % of asset value for each of the investments (6 pts.) as well as the portfolio (1 pt). What is the preferred investment (1 pt)?
For Asset A, the Probability of Default and Expected Recovery for year 2 are 12% and $50,000 respectively. What is the cumulative 2-year expected return/loss (unadjusted for PV)? (3 pts.)
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