QUESTION 6

(a)Assume that the returns on the stock can be modeled using a uniform probability distribution with a minimum of 2.5% and a maximum of 5.5%. Calculate the probability that the return in the next period will be between 2.5% and 3.5%.

(b)What is the difference between the relative frequency and subjective approach to calculating probabilities?

(c)What is the difference between an exchange rate that appreciates and depreciates and one that revalues and devalues?

QUESTION 4

(a)A pension fund must pay $1,000 at the end of each of the next five years. Find the Present Value and Duration for this set of payments when the interest rate used to find the discounted value is 0.05 or 5 %.

Suppose the pension fund invests in a portfolio of two- and five-year zero-coupon bonds and needs to satisfy the conditions to immunize its bond portfolio. It uses this portfolio to make these five payments of $1,000. Find the proportion of the fund allocated to two-year bonds