1. Discuss why, in a price-weighted index, an adjustment must be applied to reflect stock splits when calculating the index value.
2. Suppose your friend invested in the stock market and doubled her money in a single year while the market, on average, earned a return of only 5%. Is your friend's performance in the year a violation of market efficiency? Why or why not?

Question 3

1. You have purchased a bond for $973.02. The bond has a coupon rate of 6.4% and pays interest annually. It has a face value of $1,000, four years to maturity and a yield to maturity of 7.2%. The bond's duration is 3.6481 years. You expect that interest rates will fall by 0.3% later today.
2. Use the modified duration to find the approximate percentage change in the bond's price. Find the new price of the bond from this calculation.
3. Using the standard discount cash flow method based on the new yield to maturity of 6.9% (7.2% - 0.3%) and other information provided above, you calculate the price of the bond is 983.03. Compare this figure with your answer in (i) above. Is there a difference? Why is it different? Explain the reason in words and illustrate it graphically.
4. Formulate and describe a fixed-income portfolio management strategy for each of the following factors:
5. Changes in the level of interest rates.
6. Change in yield spreads across/between sectors.
7. Note: Both positive and negative changes for each factor need to be considered.