Consider two securities, both of them are dependent on the interest rate. Suppose security A has an
Question:
Consider two securities, both of them are dependent on the interest rate. Suppose security A has an expected return of 4% per annum and a volatility of 10% per annum, while security B has a volatility of 20% per annum. Suppose the riskless interest rate is 7% per annum. Find the market price of interest rate risk and the expected returns from security B per annum. Give a financial argument why the market price of the interest rate risk is usually negative.
The returns on the stocks and bonds are negatively correlated to changes in interest rates.
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1 Market Price of Interest Rate Risk The market price of interest rate risk MPIR reflects the compensation required for bearing interest rate volatili...View the full answer
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