InvestmentAnalysisandPortfolioManagement-Exeter.docVIP

Investment Analysis and Portfolio Management ERASMUS Assignment 2008-2009 Semester 1 i. Define the yield and duration of a bond. [2 marks] ii. Three pure discount bonds, all with face values of $1000, and maturities of 1, 2 and 3 years are priced at $940, $920 and $910 respectively. Calculate their yields. [7 marks] iii. Use the result from (ii) to calculate the forward rates and discount factors. What would be the equilibrium price of a coupon bond with a maturity of 3 years, a face value of $1000 and a coupon of $50? [7 marks] iv. What is the term structure? How does liquidity preference explain its common properties? [9 marks] i. How is a historic beta calculated and why might you want to adjust the value? [4 marks] ii. How can betas be employed in investment analysis? [6 marks] iii. Assume there are two stocks, A and B, with and , and idiosyncratic variation . If the variance of the market is , calculate the variance of a portfolio consisting of 40% of stock A and 60% of stock B. [6 marks] iv. Plot the portfolio frontier if A and B are the only two risky assets available and short-selling is not possible. [9 marks] 3. For a risk-averse investor with mean-variance preferences: i. Show how preferences are affected by an increase in risk aversion. [4 marks] ii. Describe the construction of the efficient portfolio frontier with and without a risk-free asset. [8 marks] iii. Assuming a risk-free asset is available, show how the proportion of it in the investors optimal portfolio is affected by an increase in risk aversion. [5 marks] iv. What are the limitations of this model of portfolio choice? [8 marks] 4. Describe the Capital Asset Pricing Model, paying particular attention to its assumptions and implications for portfolio choice. Evaluate its strengths and weaknesses relative to Arbitrage Pricing Theory. [25 marks] 5. (i) Describe cal