ECON134b: Capital Allocation Practice Problems
Q0. Correction of Questions 4 and 5 from last weeks handout
(Additional exercise: calculate the risk-aversion coefficient that would make Matthew indifferent
between the T-bill and the stock.)
Q1. Consider th
ECON 134b: Bond Valuation Practice Problems
Q1. Which security has a higher effective annual interest rate?
a) 3-month T-bill selling at $97,645 with par value $100,000
b) Coupon bond selling at par and paying a 10% coupon semiannually
Q2. A 10-year bond
Q1. The expected return on a portfolio that combines the risk-free
asset and the asset at the point of tangency to the efficient set is
25%. The expected return was calculated under he following
The risk-free rate is 5%.
The expected return o
Q1a) We are given the standard deviation and expected return of B; now we need these values
E(rA) = 0.1(40-50)/50 + 0.8(55-50)/50 + 0.1(60-50)/50 = 0.08
SD(A) = 0.1(-0.2-0.08)^2 + 0.8(0.10-0.08)^2 + 0.1(0.20-0.08)^2 = 0.0979
E(rB) = 0.09
SD(B) = 0.
Finance and Stochastics manuscript No.
(will be inserted by the editor)
Jean Jacod Philip Protter
Risk Neutral Compatibility with Option
Received: date / Accepted: date
Abstract A common problem is to choose a risk neutral measure in an incomplete
Compound Interest Formulas
The Time Value of Money
Cn: F uture value at end of n periods of C0 dollars today
I n t e rest rate
C1 = C0 + rC0 (deposit C0 for 1 period)
C1 = C0(1 + r)
C2 = C1 + rC1 (deposit C1 for 1 period)
C2 = C1(1 + r) = C0(1
Call the aggressive stock A and the defensive stock D. Beta is the sensitivity
of the stocks return to the market return, i.e., the change in the stock return
per unit change in the market return. Therefore, we compute each stocks beta
Q5. Heres a breakdown of payments for a TIPS with a coupon rate a 4%:
What were t
UNIVERSITY OF CALIFORNIA
The rationale of this course is to build a framework to evaluate financial theory in the light of
available empirical evidence, as well as to build intuiti
Annuities : a fixed number of level,
Useful shortcuts :
regular cash flows.
Let C be the cashflow received at time t = 1,2,.,n
The present value of this payment stream can be
Using the standard technique to sum a finite
geometric series, the prese
Homework 1: due 10/4/11
A father wishes to make equal annual payments to a bank account earning a 5%
interest rate to provide for his daughters education. He estimates the educational
expenses of his daughter to be as
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Time Value of Money
Review of Statistics and Portfolio Theory
For a 2 asset portfolio:
Bond Portfolio Management
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