Chapter 5
Risk and Return: Past and Prologue
1. V(12/31/2007) = V(1/1/1991) (1 + g)7 = $100,000 (1.05)7 = $140,710.04
2. i and ii. The standard deviation is non-negative.
3. c. Determines most of the portfolios return and volatility over time.
4. E(r) = [

ECON 133 Securities Markets FALL 2010, UCSC
Answer Key HOMEWORK # 6
1. Nick Leeson brought down Barings by betting on Nikkei index options. The strategy he
employed is called a short straddle. Answer the follow questions on the short straddle.
a) Draw the

ECON 133 Securities Markets FALL 2010, UCSC
HOMEWORK # 5 AK
1. Using a financial calculator, PV = -746.22, FV = 1,000, t=5, pmt = 0. The YTM is 6.0295%.
Using a financial calculator, PV = -730.00, FV = 1,000, t=5, pmt = 0. The YTM is 6.4965%.
2. A bonds c

ECON 133 Securities Markets FALL 2010, UCSC
HOMEWORK # 5 (Due Monday Nov. 8, BEGINNIG
OF CLASS)
1. CH.10.5 A zero-coupon bond with face value $1,000 and maturity of five years sells for
$746.22. What is its yield to maturity? What will happen to its yield

Chapter 11
Managing Bond Portfolios
1. The percentage bond price change is:
y
0.0050
Duration 1 y 7.194 1.10 0.0327 or a 3.27% decline
2. Computation of duration:
a. YTM = 6%
(1)
Time until
Payment
(Years)
1
2
3
(2)
Payment
60
60
1060
Column Sum:
(3)
Pay

ECON 133 Securities Markets FALL 2010, UCSC
HOMEWORK # 1 AK
1. CH.1.5 Real assets are assets used to produce goods and services. Financial assets are
claims on real assets or the income generated by them.
2. CH. 1.9
a. The bank loan is a financial liabili

Chapter 8
The Efficient Market Hypothesis
1. The correlation coefficient should be zero. If it were not zero, then one could use
returns from one period to predict returns in later periods and therefore earn abnormal
profits.
2. c
This is a predictable pa

Chapter 6
Efficient Diversification
1. E(rP) = (0.5 x 15) + (0.4 x 10) + (0.10 x 6) = 12.1%
2. Fund D represents the single best addition to complement Stephenson's current
portfolio, given his selection criteria. First, Fund Ds expected return (14.0 perc

Chapter 7
Capital Asset Pricing and Arbitrage Pricing Theory
1. a,candd
2.
a. E(rX) = 5% + 0.8(14% 5%) = 12.2%
X = 14% 12.2% = 1.8%
E(rY) = 5% + 1.5(14% 5%) = 18.5%
Y = 17% 18.5% = 1.5%
b.
(i) For an investor who wants to add this stock to a well-diversif

Chapter 2
Asset Classes and Financial Instruments
1. Taxable equivalent yield = .0675 / (1-.35) = .1038
2. c
3.
a. You would have to pay the asked price of:
118:31 = 118.9688% of par = $1,189,688
b. The coupon rate is 11.750%, implying coupon payments of