Capital Markets Practice Midterm 2

Question 1 (35 points)

You are given the following information on two US government riskless bonds:

•   A 9-year 9% coupon bond with a yield to maturity of 13%

•   A 20-year 4% coupon bond with a yield to maturity of 6%

I must see all your calculations; you cannot simply cut and paste your answer from another worksheet. If you do, you will not receive credit for this question.

a)  What is the duration for each of the bonds?

b)  What is the duration of a portfolio of these bonds that has $4.25 million invested in the 9-year bond and is short $3.20 million in the 20-year bond?

c)  What would be the rationale to invest in a portfolio like that in (b)?

Question 2 (38 points)

Use the following four funds and Portfolio Visualizer to answer the following questions.

•   WTV: Wisdom Tree US Value ETF

•   BRSVX: Bridgeway Small-Cap Value Mutual Fund

•   PRKQX: PGIM Real Estate Income Mutual Fund

•   VSIEX: JPMorgan International Equity Mutual Fund

When using Portfolio Visualizer’s Historical Efficient Frontier optimization, in the top menu set the following:

•    Portfolio Type: Tickers

•    End Year: 2021

•    Min Variance Frontier: Yes

When you list out the Efficient Frontier Assets, leave the Allocation column empty

If an investor has a risk-aversion parameter, gamma, of 20, what is that investor’s optimal portfolio? Assume a risk-free rate of 0.3%.

Specifically:

a)  What is the composition, expected return, standard deviation, and Sharpe ratio of the tangent portfolio?

b)  What is the investor’s optimal percent holdings in (i) the tangent portfolio and (ii) the risk-free asset?

c)  What is that investor’s optimal investment weights in the four funds?

d)  What are the expected return and risk of this investor’s optimal portfolio?

Question 3 (35 points)

Answer the following questions true or false. No explanation is needed.

a)  You use a market order over a limit order when you do not care about the price you trade at.

b)  The returns on buying and selling Treasury-bills and -bonds are 100% risk-free.

c)  ETFs have varying market prices throughout the trading day and mutual funds trade at one price per day, the 4:00 PM EST NAV of the mutual fund

d)  You do not have to consider capital gains taxes to determine how often you re- balance a portfolio?