HTBM LLC, a US hedge fund, considers investing in both bonds and stocks in Australia market. Two straight bonds and two ASX stocks are shortlisted by HTBM LLC. Bond P has a par value of $1,000, paying 6 percent coupon rate semi-annually, 10 years to maturity, and a credit rating of AA. Bond Q has a par value of $1,000, paying 4 percent coupon rate semi-annually, 8 years to maturity, and a credit rating of AAA. Stock X has an expected return of 8 percent, a standard deviation of 10 percent, and a correlation of 0.8 with the market portfolio. Stock Y has an expected return of 9 percent, a standard deviation of 12 percent, a correlation with the market portfolio of 0.2, and a correlation with Stock X of 0.6. The stock market portfolio has a standard deviation of 10 percent. The correlation between the bond and stock portfolios is -0.27. The yield of 3-month Treasury bill is 1.8 percent. The required yields (YTM) for AA and AAA are 6 and 4 percent over 3-month Treasury bill yield, respectively. HTBM LLC would hold the bonds until maturity. Assume CAPM holds. Required: (a) Compute the prices for Bond P and Q. Which bond is relatively sensitive to a change in market interest rate?

(b) What are the expected return and standard deviation of a stock portfolio consisting of 70 percent of Stock X and 30 percent of Stock Y? Which stock is relatively sensitive to a change in market risk?

(c) During risk-off period, investors expect the risk increases in the market and all securities generally perform badly. What is the relationship between the securities prices and expected interest rate? Rank the stocks (Stock X and Y) and the bonds (Bond P and Q) separately from the highest price change to lowest price change during riskoff period.

(d) What are the main considerations if HTBM LLC would like to include additional stocks, bonds and/or other asset classes in the portfolio?