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Question 1: You expect market interest rates to fall, while the rest of the market believes there will be an increase. Which of the following

Question 1:

You expect market interest rates to fall, while the rest of the market believes there will be an increase. Which of the following statements about fixed-coupon bonds is most correct?

a.

You should sell your bonds before the drop in interest rates.

b.

Bond yields and prices are expected to fall

c.

You should invest in short-term securities rather than long-term bonds.

d.

At the maturity date, regardless of changes in market interest rates, a bond price will be equal to the face value plus the coupon.

e.

As the coupon rate is fixed, the interest rate change will have no impact on the bond.

Question 2:

An investor has a portfolio of two assets A and B. The details are shown in the below table.

Portfolio Details

Asset

Expected return

Standard deviation

Covariance (A, B)

Expected

Portfolio Return

A

0.06

0.5

0.12

0.1

B

0.08

0.8

Which one of the following statements is NOT correct?

a.

The variance of the portfolio is 2.33.

b.

The order of short selling is borrowing, buying, selling, and returning.

c.

The portfolio weight in asset A is -100%.

d.

The investor can benefit from a fall in the price of asset A.

e.

The correlation of asset A and Bs returns is 0.3.

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