Question Details

What is the expected value of the effective yield based on this information


1. Impact of September 11. Palos Co. commonly invests some of its excess dollars in foreign
government short-term securities in order to earn a higher short-term interest rate on its cash.
Describe how the potential return and risk of this strategy may have changed after the September
11, 2001 terrorist attack on the U.S.

2. Investing in a Portfolio. Pittsburgh Co. plans to invest its excess cash in Mexican pesos for one
year. The one-year Mexican interest rate is 19%. The probability of the peso- percentage change
in value during the next year is shown below:
Possible Rate of Change
in the Mexican Peso Over Probability of
the Life of the Investment Occurrence
-15% 20%
-4% 50%
0% 30%
What is the expected value of the effective yield based on this information? Given that the U.S.
interest rate for one year is 7%, what is the probability that a one-year investment in pesos will
generate a lower effective yield than could be generated if Pittsburgh Co. simply invested
domestically?


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