Question

A portfolio manager buys $1 million of U.S. Treasury bills maturing in 90 days at a price of $990,390 and discount rate of 3.8%. The portfolio also includes the following investments: Bank commercial paper maturing in 90 days with a bond equivalent yield of 4.34% and a market value of $100,000. Bank certificates of deposit maturing in six months with a bond equivalent yield of 4.84% and a market value of $200,000. The bond-equivalent yield of a comparable benchmark portfolio is 4.0%. Including the Treasury bill purchase, the manager's portfolio is:

Answer 1

A. Outperforming the benchmark

Step-by-step explanation:

Calculation to determine what the manager's portfolio

First step is to calculate the Treasury bill, bond-equivalent yield for U.S.

Using this formula

Treasury bill

=(Face value − Market value) / Market value × 365 / 90

Let plug in the formula

Treasury bill= ($1,000,000 − 990,390) / 990,390 × 365 / 90

Treasury bill=0.0097 × 0.04056

Treasury bill= 3.93%.

Second step is to calculate The total market value of the portfolio

Total market value portfolio=$990,390 + $100,000 + $200,000

Total market value portfolio= $1,290,390

Now let calculate the manager's portfolio

Manager's portfolio=3.93% ($990,390 / $1,290,390) + 4.34% ($100,000 / $1,290,390) + 4.84% ($200,000 / $1,290,390)

Manager's portfolio=3.93%(76.75%)+4.34%(7.75%)+4.84%(15.50%)

Manager's portfolio=0.0410*100

Manager's portfolio= 4.10%

Therefore Based on the above calculation the manager's portfolio is 4.10% OUTPERFORMING THE BENCHMARK because the manager's portfolio of 4.10% is higher than bond-equivalent yield benchmark portfolio of 4.0%.