Question

1.)The higher a bond's duration, the _______________. If your portfolio has a duration of 7 years and your target date is 7.3 years, you should _______________.

2.) The standard deviation of annual returns is 44.6% for Stock #1 and 59.1% for Stock #2. The correlation of Stock #1's returns to Stock #2's returns is +1. You want to create a hedged, net-long portfolio. Which of the choices below will accomplish that goal?

3.) A well-diversified portfolio has an expected return that is _______ the weighted average of the expected returns of the assets inside of it and a risk level that is _______ the weighted average of the risk levels of the assets inside of it.

Answer 1

Ans 1) The higher a bond's duration, the higher the interest rate risk.(because the per unit change in interest rate will impact more if the duration is more) If your portfolio has a duration of 7 years and your target date is 7.3 years, you should sell lower duration bond and buy higher duration bond. (in that way duration of portfolio will increase)

Ans 3) A well-diversified portfolio has an expected return that is equal to the weighted average of the expected returns of the assets inside of it and a risk level that is lower than the weighted average of the risk levels of the assets inside of it.