Question 1 An sconamy has only two risky assats: asset A and asset B. Asse: A represents the stocks of Netflix, B the stocke of Amazon, respectively. Both assets pay uncertain rates of retum expected returns and standard deviations as follows: Fit) = 6% Fir) = 185 r.) -12%, 017-21% Further the correlation coefficient between the retums on these two assass-0.4 Required - You have 1000 and you would like to invest E700 inta asse: A and C300 into assel B. Cuirgule the expected netum of your portfolio call it AB) and its slandard deviation. Would you prefer to invest inta this potiollo or into a single asset A or B? Justify your ariswer (30 markB) Suppose that there is no more asset available in the economy, asset C that represents the stocks of Youtube. The expected return on this assct is 26%. its standard deviation is 24% and the assel is not cartelated to portfolio AA that you reorived in a You now have additional (500 and you would like to diversity further your portiolio tus decde to invest all the amount into assel C so that in the end you have a portfolio of three sesats: A B and C. Compute the expected return of the new portfolit and its standard deviation. You should also comment on the diversification abilities of assed with respect your portfolio AB and scuss the limits of the diversification (40 marks) Explain thoroughly the difference between beta as a measure of risk and variance as a measure of risk (30 marks) Question 4 Suppose you currently observe the following term structure of irrarest rates (annualized rates= 2%. = 48 = 9% r. = 10%. = 13%, r. = 15% Notation:r, stands for -year interest rate. Given the above information: ... Find the prices of the folowing two tonds: two year bond with coupon rate 5% and face value $1000 (paying coupons annually) and (ii) four-year bond with coupon rate 8% and with face value $1000 (ayng coupons annually) and justify the methodology you use for finding the prices of these bords Do these bonds sell at a discount or a pretium? Give reasons to your answer. (30 marks) Explain what the yield to maturty on a tord is and how you would find it. For the four year and two year bords from a) guess the magnitude of their le de fronted to calculate the yiekls) and give reasons ta your guess. (30 marks) Explain carefully the type of risk that investoes face when investing in government bonds and how this nsk is later in the upuard-skoping term structures of interest rates. (40 marks) Total 100%) Question 4 Suppose you currently observe the following term structure of interest rates (annualized rates): - 2%, 12 = 4%, 1 = 8%, a = 10%, 15 - 13%.19 = 15%. Notation:rstands for i-year interest rate. Given the above information: ca Find the prices of the following two bonds: 6) two- year bond with coupon rate 5% and face value $1000 (paying coupons annually) and () four-year bond with coupon rate 8% and with face value $1000 (paying coupons annually) and justify the methodology you use for finding the prices of these bonds. Do these bonds sell at a discount or a premium? Give reasons to your answer. (30 marks) (b) Expla what the yield to maturity on a bond is and how you would find it. For the four-year and two-year bonds from (a) guess the magnitude of their yields (no need to calculate the yields) and give reasons to your guess. (30 marks) (e) Explain carefully the type of risk that investors face when investing in government bonds and how this risk is related to the upward-sloping term structure of interest rates. (40 marks) (Total 100%) Question 1 An economy has only two risky assets: asset A and asset B. Asset A represents the stocks of Netflix, B the stocks of Amazon, respectively. Both assets pay uncertain rates of retum expected returns and standard deviations as follows: E) = 6%, E() = 18% o(r.) = 12%, or.) = 21% Further the correlation coefficient between the returns on these two assets is -0.4. Required - (a) You have 1000 and you would like to invest 700 into asset A and 300 into asset B. Compute the expected return of your portfolio (call it AB) and its standard deviation. Would you prefer to invest into this portfolio or into a single asset A or B? Justify your answer. (30 marks) (b) Suppose that there is one more asset available in the economy, asset C that represents the stocks of Youtube. The expected return on this asset is 26%. its standard deviation is 24% and the asset is not correlated to portfolio AB that you received in (a). You now have additional 500 and you would like to diversify further your portfolio thus decide to invest all the amount into asset C so that in the end you have a portfolio of three assets: A, B and C. Compute the expected return of the new portfolio and its standard deviation. You should also comment on the diversification abilities of asset C with respect to your portfolio AB and discuss the limits of the diversification (40 marks) Explain thoroughly the difference between beta as a measure of risk and variance as a measure of risk. (30 marks)