1. It was observed in class that as of August 7, 2009, 63% of AAA non-agency MBS issued from 2005-2007 had been downgraded; 53% to BB or lower. Managers of investment-grade portfolios who bought AAA non-agency MBS that were downgraded to BB or lower would have encountered which of the following immediately after a AAA to BB (or lower) downgrade?

a. They would not have been required to sell and would have taken a mark-to-market loss.

b. They would have been required to sell and would have taken a loss on the sale.

c. They would have been required to sell and would have made money on the sale.

d. They would not have been required to sell and would have taken a mark-to-market gain.

e. None of the choices given is correct..

2.What is the risk (std-dev) of the Times-Mirror/Unilever portfolio composed of 21% Unilever if the correlation of returns of these two stocks is -0.37? The return standard deviation for Times-Mirror is 0.25 and that of Unilever is 0.40. (Enter your answer to 2 decimal places: e.g., 0.23)

3. Systemic portfolio risk:

a. Group of answer choices

b. Is company-specific risk.

c. Is another name for idiosyncratic risk.

d. Cannot be reduced through diversification.

d. None of the choices given is correct.