1. Market analysts forecast that the economy in future would be either steady or boom or in recession with a probability of 40%, 35% and 25% respectively. If annual returns of AB Company shares are 8.5%, 15.6% and 4.25% under each economic condition respectively, what would be the expected return in future?

1. 9.45%
2. 9.92%
3. 8.78%
4. 10.25%

2. Markowitzs modern portfolio theory assumes that there are two asset types being:

1. Low risk and high risk assets.
2. Low risk and moderate risk assets.
3. Risky and risk-free assets.
4. None of the above.

3. Which of the following statements is incorrect about the benefits of diversification?

1. A correlation coefficient of 1 would indicate that the returns of two assets move positively with each other.
2. Portfolio risk can be reduced to close to zero when the returns of the shares contained in the portfolio are perfectly positively correlated, that is they have a correlation coefficient of 1.0.
3. Portfolio risk can be reduced to close to zero when the returns of the shares contained in the portfolio are perfectly negatively correlated, that is they have a correlation coefficient of 1.0.
4. A correlation coefficient of 1 would indicate that the returns of two assets move inversely from each other.

4. What is the yield to maturity (YTM) of a 10-year bond that pays a coupon rate of 8.5% p.a., paid semi-annually, has a $1000 par value and is currently priced at $987?

1. 7.60%
2. 8.70%
3. 12.24%
4. 4.35%