Question
1.An analyst estimates that the probability of default on a seven-year AA-rated bond is 0.55, while that on a seven-year A-rated bond is 0.45. The
1.An analyst estimates that the probability of default on a seven-year AA-rated bond is 0.55, while that on a seven-year A-rated bond is 0.45. The probability that they will both default is 0.34.
a. What is the probability that at least one of the bonds defaults? (Round your answer to 2 decimal places.)
b. What is the probability that neither the seven-year AA-rated bond nor the seven-year A-rated bond defaults? (Round your answer to 2 decimal places.)
c. Given that the seven-year AA-rated bond defaults, what is the probability that the seven-year A-rated bond also defaults? (Round your answer to 2 decimal places.)
2.The historical returns on a balanced portfolio have had an average return of 14% and a standard deviation of 13%. Assume that returns on this portfolio follow a normal distribution. (You may find it useful to reference the z table.)
a. What percentage of returns were greater than 40%?(Round your final answer to 2 decimal places.)
b. What percentage of returns were below 25%? (Round your final answer to 2 decimal places.)
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