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1. You currently have one stock in your investment portfolio. It is APT. You are considering adding one more stock to your portfolio so that

1. You currently have one stock in your investment portfolio. It is APT. You are considering adding one more stock to your portfolio so that your portfolio has a 50% weight in APT and a 50% weight in the other stock. You can add CBA, ANZ or NAB. You expect CBA, ANZ and NAB to each provide a return of 5% over the next 12 months. The correlation between APT and CBA is 0.5. The correlation between APT and ANZ is 0.45. The correlation between APT and NAB is 0.4. Which stock would you combine with APT to provide the lowest portfolio risk?

a.

CBA

b.

NAB

c.

Unsure, more information is required.

d.

ANZ

2.

A risk-averse investor can borrow or lend at a risk-free rate of 3%. Which of the following risky portfolios would the investor combine with the risk-free asset to maximise their utility?

a.

Portfolio C: Expected return = 6%, Standard Deviation = 10%

b.

More information is required

c.

Portfolio B: Expected return = 5%, Standard Deviation = 7%

d.

Portfolio A: Expected return = 4%, Standard Deviation = 3%

3.

An insurance company must make payments to a customer of $1 million in one year and $400,000 in four years. The yield curve is flat at 10%. Use annual compounding. If the company wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what must be the face value of the zero-coupon bond?

a.

$1.83 million

b.

$1.39 million

c.

$8.37 million

d.

$3.81 million

4.

An insurance company must make payments to a customer of $1 million in one year and $400,000 in four years. The yield curve is flat at 10%. Use annual compounding. If the company wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what must be the market value of the zero-coupon bond?

a.

$1.18 million

b.

$5.78 million

c.

$2.35 million

d.

$4.57 million

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