1.

Bond B has four-year bonds outstanding that pay a coupon rate of 7 percent and make
coupon payments semiannually. If these bonds are currently selling at $929, what is the yield
to maturity that an investor can expect to earn on these bonds? What is the effective annual
yield? Does the investor should invest in this bond? When T- bill is 4%, Beta is 1.2 and the
market return is 12%.
2. An investor consider to invest in three financial assets, including stock S, stock B and a T-
bill (C) with the information belows. Given that risk-free rate is 2%
Dividend of Price of Dividend
Year Price of stock S stock S stock B of stock
B
1 26.4 17
2 25.8 1.5 19.3
3 26.8 20.4
4 27.7 2 19
5 28.8 23.5
6 29.1 24.1 3
7 30 25
What are the investment proportion of (S) and (B) in the minimum-variance portfolio
3. Bond B has maturity 6-year with 10% coupon rate and $1000 face value is selling for
$1,134. Calculate the yield to maturity on the bond assuming annual interest payments. Does
the investor should invest in this bond ? When T- bill is 4%, Beta is 1.3 and the market return
is 10%.
4.
Consider the following probability distribution for Stock A and B
State Probability Return on Stock A Return on Stock B
1 0.2 11% 9%
2 0.2 14% 8%
3 0.1 11% 6%
4 0.3 15% 7%
5 0.2 14% 8%

a/ If you invest 40% of your money in A and 60% in B, what would be your portfolio's
expected rate of return and standard deviation?
b/ What are the investment proportion of (A) and (B) in the minimum-variance portfolio.
What is the expected return and standard deviation of new portfolio
5. The pension with the obligation makes perpetual payment of 1.5 million per year to the
beneficiaries. YTM for all bonds is 13%.
a/ Bond A with 5 years maturity coupon rate 11% annual payment (duration is 4 years). Bond
B with 20 years maturity bonds coupon rate is 7% annual payment (duration is 10 years).
How many bonds do the pension fund should hold to fulfill the obligation?
 b/ What is the par value of your holding in 20 years coupon bond?
6. Rf= 5%
Expected return Standard deviation
Optimal risky portfolio 11% 9%
Minimum-variance 9% 7%
portfolio
a/ If the investor chooses to invest 60% in the optimal risky portfolio and 40% in a T-bill
(Complete portfolio 1). Calculate the expected return and standard deviation of the complete
portfolio 1
b/ If the investor chooses to invest 70% in the minimum-variance portfolio and 30% in a
T-bill (Complete portfolio 2). Calculate the expected return and standard deviation of the
complete portfolio 2
c/ Which complete portfolio that investor should choose if risk aversion is A= 3
7. A investor is considering three financial assets, including stock (S), long-term coupon
bond (B), and a T-bill that yield a rate of 8%. Expected rate of return and standard deviation
of stock and bond are as follow:
Expected return Standard deviation
Stock (S) 20% 30%
Bond (B) 12% 15%
Correlation between stock and bond 0.10
a/ What are the investment proportion in the minimum-variance portfolio of the two
risky assets, and what is the expected return and standard deviation of the portfolio?
b/ What are the investment proportion of (S) and (B) in the optimal risky portfolio, and
what is the expected return and standard deviation of the portfolio?
c/ What is the Sharpe ratio of the best feasible CAL?
d/ You require that your complete portfolio yield an expected return of 14%, and that it
be efficient, on the best feasible CAL. What is the standard deviation of your portfolio? What
is the proportion invested in the T-bill fund and risky portfolio?

8. Current price of stock X and Y are $54 and $32 respectively. A financial analyst of ABC
Security Company forecasts the price of stock X and Y after 1 year as following:
Economic conditions Probability Price of stock X Price of stock Y
Bad 0.2 42 27
OK 0.4 58 35
Good 0.4 65 40

a. What are expected return and standard deviation of the two stocks.
b. What are expected return and standard deviation of the risky portfolio P which invests 60%
in stock X and 40% in stock Y.
c. How much should investor invest in risky portfolio P in order to construct an optimized
complete portfolio, given risk-free rate is 6% and A = 3.
d. What are expected return and standard deviation of optimized complete portfolio?
 9. An investor is considering adding a risk-free asset with a return of 3% into his risky
portfolio. The expected return and standard deviation of the risky portfolio is 7% and 15%.
His risk aversion value is 2
a) Calculate the optimal proportion invested in risk-free asset
b) Write an equation for the capital allocation line that will connect the risk-free asset to
the portfolio of risky assets
c) What is the standard deviation of the new portfolio that gives a 9% return and is on
the capital allocation line?

10.Bond A has 5% coupon rate, maturity is 10 years, YTM=7%

a. Find HPR for a year investment period if YTM is 6% in the end of year.
b. If you sell bond after 1 year, tax on interest income is 40% and tax rate on capital gain is
30%. The bond is subject to original issue discount tax treatment.
c. What is after tax holding period return on the bond?

11.The pension with the obligation makes perpetual payment of 1.5 million per year to the
beneficiaries. YTM for all bonds is 13%.
a/ Bond A with 5 years maturity coupon rate 11% annual payment (duration is 4 years). Bond
B with 20 years maturity bonds coupon rate is 7% annual payment (duration is 10 years).
How many bonds do the pension fund should hold to fulfill the obligation?
b/ What is the par value of your holding in 20 years coupon bond?
12. A newly issued par value bond has a maturity of 4 years and pays a 7% coupon rate (paid
annually). The bond price is par value. What are the convexity and the duration of the bond?