You Can Form a Portfolio from the Following Assets: T-Bill

question 37

Essay

You can form a portfolio from the following assets: T-bill futures,T-bond futures,stock index futures,and IBM stock.Given the following predictions,indicate which of these assets you would hold and whether you'd be long or short in the asset,so that you will profit if your prediction is correct.(You don't have to give numbers.)
a. While the total sales of computers will depend on the overall state of the economy and the stock market (about which you have no strong beliefs), you firmly believe that IBM is going to lose market share.
b. The yield curve is currently upward sloping. You don't have any idea where interest rates on average are headed, but at the end of this year, you firmly believe that the yield curve will be downward sloping.
c. You believe that the stock market is driven by corporate profits and (inversely) by interest rates. You think that corporate profits are due for a big surge next year, but you aren't sure about interest rates.
d. You believe that stocks are going to go up next year, unless there is a spectacular short crash like the one that occurred in October 1987. If there is a crash, you believe that there will be a "flight to safety", i.e., that investors will dump stocks and buy government bonds.

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Definitions:

Sales-Type Lease

A lease agreement where the lessor recognizes immediate profit similar to a sale, often used in the context of finance leases in accounting.

Unearned Interest: Leases

Interest that has been collected on a lease but not yet earned, often because the period it covers has not fully elapsed.

Present Value Factors

Numeric factors used in calculating the present value of future cash flows, reflecting the time value of money.

Interest Revenue

Income earned from investments in interest-bearing assets like bonds, loans, and savings accounts.