Question
a. Explain the difference between a limit buy order and a stop buy order. (7 marks) b. Portfolio B consists of 15 stocks, 15 of
a. Explain the difference between a limit buy order and a stop buy order. (7 marks) b. Portfolio B consists of 15 stocks, 15 of which have beta 1 and unsystematic variance 0.03, and 5 of which have beta 1 and unsystematic variance 0.05. What is the unsystematic variance of B at its minimum point? You should assume that the unsystematic risks of the stocks included in B are independent across stocks. (Hint: the portfolio that minimises the unsystematic variance has equal weights in stocks with the same unsystematic variance.) (9 marks) c. A pension insurer discovers that it must make additional annual pension payments of $50m in years 6 through 10. The current interest rate is 5% and you should assume a flat term structure. The pension insurer seeks to hedge the additional liability by investing in two bond portfolios A and B with durations 3 and 10, respectively. The insurer must also ensure that the investment in A and B is sufficiently large to match the value of the liability of the additional pension payments. How much should the insurer invest in portfolios A and B?
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