Question 2 Table 1 below lists the loadings of UST zero returns on the Level and Slope factors, as explained in the lecture notes. a) Consider a portfolio with equal pv weights in each zero. Say $10 in each zero, for a total portfolio value of $100 What is the portfolio dollar loading on the Level factor? What is the portfolio dollar loading on the Slope factor? b) Suppose you tried to hedge the Level risk of a short position in this portfolio with a long position in the 5-year zero What pv of the 5-year zero would you need to buy to hedge the Level risk of your net position? If you bought this amount of the 5-year zero, what would be the dollar loading of your net position on the Slope factor? Table 1: Factor loadings of UST zeroes 1 (Leve Slope Factor var. (X): As % of total: Factor vol.: Factor SR 1-year zero q 2-year zero q: 3-year zero q: 4-year zero q 5-year zero q: 6-year zero q: 7-year zero q: 8-year zero q: 9-year zero q: 10-year zero q 567 96.8% 23.81 0.40 0.05 0.11 0.16 0.22 0.28 0.33 0.37 0.41 0.44 0.47 14 2.4% 3.74 0.30 0.19 0.33 0.39 0.41 0.37 0.24 0.07 0.09 0.29 0.50 Question 2 Table 1 below lists the loadings of UST zero returns on the Level and Slope factors, as explained in the lecture notes. a) Consider a portfolio with equal pv weights in each zero. Say $10 in each zero, for a total portfolio value of $100 What is the portfolio dollar loading on the Level factor? What is the portfolio dollar loading on the Slope factor? b) Suppose you tried to hedge the Level risk of a short position in this portfolio with a long position in the 5-year zero What pv of the 5-year zero would you need to buy to hedge the Level risk of your net position? If you bought this amount of the 5-year zero, what would be the dollar loading of your net position on the Slope factor? Table 1: Factor loadings of UST zeroes 1 (Leve Slope Factor var. (X): As % of total: Factor vol.: Factor SR 1-year zero q 2-year zero q: 3-year zero q: 4-year zero q 5-year zero q: 6-year zero q: 7-year zero q: 8-year zero q: 9-year zero q: 10-year zero q 567 96.8% 23.81 0.40 0.05 0.11 0.16 0.22 0.28 0.33 0.37 0.41 0.44 0.47 14 2.4% 3.74 0.30 0.19 0.33 0.39 0.41 0.37 0.24 0.07 0.09 0.29 0.50