A person is about to retire and must

From 1926 to the end of 1996, the annual standard deviation of returns for long-term government bonds was 9.2 percent, whereas that of intermediate-term government bonds was only 5.8 percent. Despite this, the average annual return on both groups of bonds was 5.4 percent. How can these results be explained to people who like return and dislike risk? Use the bonds in Table 3-6 to solve Problems 1 and 2. A person wins $1 million in the state lottery. Actually, the person receives $50,000 per year every September 1. Using a 10 percent discount rate and the bonds in the table, construct a cash-matched dedicated portfolio that will service this need. Use the bonds in the table plus 90-day Treasury bills with a price of $9, 800 to assemble a duration-matched portfolio for the lottery payments in Problem 1. The Duration file on the text website (http://strong.swlearning.com) will calculate the individual bond durations. (This is easiest to do via a linear program with an objective function that minimizes the number of bonds used.) A person is about to retire and must choose between three retirement plan options. One provides $55,000 per year for the remainder of his life. Another provides 85 percent of this amount and increases by 5 percent each year. A third option gives him a $400,000 lump-sum settlement. If his remaining life expectancy is twelve years, the prime interest rate is 8 percent, and he can ignore taxes, which should he choose? Would your answer to Problem 4 be different if the prime interest rate were 15 percent and was expected to stay there for the foreseeable future