Chapter 5 Modern Portfolio Theory
Introduction
One of the major concepts that most investors should be aware of is the relationship
between the risk and the return of a financial asset. It is common knowledge that there is
a positive relationship between

Market Tracking Contest
Fall 2014
There are nine assets in the market tracking assignment: S&P 500;
Nasdaq Composite; Nikkei; GE; Yen; Euro; Oil; 3-month Treasury bill; 10-year
Treasury bond. Pick one asset from this list that you think will have the high

Interest rate:
9.50%
Time until
Payment
Column(B)
Payment
Discounted
X
at 9.5%
Column(E) Matuity
(Years)
A. A 10% Coupon Bond
Payment
Weight*
Yield to
1
10 $
9.13
0.0905
0.0905
2
110 $
91.74
0.9095
1.8189
$
100.87
Sum:
B. A Zero Coupon Bond
1
2
Bond 1
100

Continuous compounding
Financial Derivatives
Finance 206/717
Philip Bond
Wharton, University of Pennsylvania
Bond FNCE 206/717 p. 1/9
Discrete compounding
Recall that the effective interest rate depends on the number of compounding
periods.
Interest rates

Brief Answers to Concept Questions from Before / After: Topic 8
William L. Silber
Q1. A company that has never paid dividends can be valued using the
dividend discount model because what matters for the dividend discount model is
expected future dividends

Brief Answers to Concept Questions from Before / After: Topic 9b
William L. Silber
Q1. Normal shapes of the yield curve are upward sloping, downward
sloping and flat curves. A humped yield curve is more unusual. The slope of the
yield curve is conventiona

Brief Answers to Concept Questions from Before / After: Topic 9a
William L. Silber
Q1. The discount rate on a Treasury bill is always less than the BYE of
the same bill since the discount rate has F (the face value) in the denominator
rather than P (the p

CH06 p.095-110
10/28/03
11:09 AM
Page 95
CHAPTER 6
The Structure and
Performance of
Securities Markets
Tom Cruise needs a script, Annie Leibovitz a camera, and Venus Williams a tennis
racket. Each performer uses the props appropriate for the medium in que

Brief Answers to Concept Questions from Before / After: Topic 7
William L. Silber
Q1. The proper discount rate is the required rate of return from the CAPM
since that is the risk adjusted discount rate investors require to hold the
companys equity. This d

Brief Answers to Concept Questions from Before / After: Topic 6
William L. Silber
Q1. Homogeneous expectations means that everyone has the same
estimate of means, standard deviations and covariances for all securities. That
information produces the same e

Brief Answers to Concept Questions from Before / After: Topic 5a
William L. Silber
Q1. If a securitys returns are normally distributed then the mean and
standard deviation summarize all the information needed to describe the
distribution. If two securitie

Brief Answers to Concept Questions from Before / After: Topic 5b
William L. Silber
Q1. The nave diversification rule of dividing your net worth equally among
all securities ignores differences in the means, standard deviations and
correlations among indiv

Brief Answers to Concept Questions from Before / After: Topic 4
William L. Silber
Q1. Arbitrage is more powerful than supply and demand in the
following sense: if irrational supply or demand preferences produce different
prices for the same asset traded i

Brief Answers to Concept Questions from Before / After: Topic 3
William L. Silber
Q1. The supply and demand for credit determines the equilibrium level of
interest rates. An important determinant of the supply of credit is saving (not
consuming) while an

Brief Answers to Concept Questions from Before / After: Topic 1
Q1. Cash flows must be adjusted for their timing (present value adjustments), any implicit
options (option value adjustments) and their risk
profile (risk adjustments). These characteristics

Brief Answers to Concept Questions from Before / After: Topic 1
William L. Silber
Q1. Cash flows must be adjusted for their timing (present value
adjustments), any implicit options (option value adjustments) and their risk
profile (risk adjustments). Thes

Brief Answers to Concept Questions from Before / After: Topic 2
William L. Silber
Q1. When the number of compounding periods is large the discrepancy
between simple and compound interest becomes great, hence we use compound
interest in going from present

Brief Answers to Concept Questions from Before / After: Topic 7
Q1. The proper discount rate is the required rate of return from the CAPM since that is the risk adjusted discount rate investors
require to hold the companys equity. This discount rate adjus