Question

What type of security can minimize both price risk and reinvestment risk for an investor with a fixed investment horizon? Explain.

Answer #1

Considering a fixed investment horizon, a zero coupon treasury
bond having a maturity period matching the investment horizon of an
investor can minimize both price risk and reinvestment risk.

Reinvestment risk in case of a bond refers to reinvestment of the
cash flows from the bond at a return close to current investment
rate of return. As a zero coupon treasury bond do not pay any
coupon payment, it won't carry any reinvestment risk.

The bond holder in case of a zero coupon treasury bond, receives a guaranteed payment at maturity of the bond. This payment is equal to face value or par value of the bond. Price risk (increase or decrease in a bond value due to interest rates) matters if a bond is sold before maturity.. However, on selling a bond at its maturity, price risk won't matter as the payment will be equal to face or par value.

What type of security can minimize both price risk and
reinvestment risk for an investor with a fixed investment horizon?
Explain.

what type of security can minimize both price risk and reinvestment
risk for an investor with a fixed investment horizon?
explain.

Suppose a security has a current price of $15.00, and Investor A
expects the security price to increase by 10% in one year with 60%
probability or decrease by 5% in one year with 40% probability.
Investor B agrees with Investor A’s values of the future prices but
feels that the likelihood of either future price occurring is 50%.
Assuming a 3% annual risk-free rate, what is the price of a
one-year call option that has a strike price of...

An analyst stated that a callable bond has less reinvestment
risk and more price appreciation potential than an otherwise
identical noncallable bond. The analyst's statement most likely is
:
a. incorrect with respect to both reinvestment risk and price
appreciation potential
b. incorrect with respect to reinvestment risk but correct with
respect to price appreciation model
c. correct with respect to reinvestment risk but incorrect with
respect to price appreciation model.

An investor wants to minimize market risk on a $50 million stock
portfolio by using futures for hedging. The portfolio’s beta with
respect to the S&P 500 equity index is 1.25. The current index
futures quote is 2,875 and each contract is for delivery of $250
times the index.
a. What futures position should the investor open to execute the
hedge? Long or short?
b. How many index futures contracts does the investor need to
use to minimize market risk?...

Create a scenario in which an investor would benefit from using
option contracts to minimize risk.
Evaluate how models used for valuing stock options can be
adapted to other underlying assets such as stock indexes. Reply
QuotE

Investment companies attempt to explain to investors the nature
of the risk the investor incurs when buying shares in their mutual
funds. For example,
go to https://personal.vanguard.com/us/funds/
vanguard/all?sort=name&sortorder=asc.
a. Select the bond fund you would recommend to an investor who
has a very low tolerance for risk.Justify your answer.
b. Select the bond fund you would recommend to an investor who
has a higher tolerance for risk and a long investment horizon.
Justify your answer.

Security A has a beta of 1.0 and an expected return of 12%.
Security B has a beta of 0.75 and an expected return of 11%. The
risk-free rate is 6%. Both these two securities are in the same
market. Explain the arbitrage opportunity that exists; explain how
an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell (we assume
that the company-specific risk can be neglected)....

Security A has a beta of 1.0 and an expected return of 12%.
Security B has a beta of 0.75 and an expected return of 11%. The
risk-free rate is 6%. Both these two securities are in the same
market. Explain the arbitrage opportunity that exists; explain how
an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell (we assume
that the company-specific risk can be neglected)....

Question 1
In terms of bonds, what is “reinvestment risk”?
a) Change in price due to changes in interest rates.
b) Risk of investing funds in debt of questionable credit
quality.
c) Uncertainty concerning rates at which cash flows can be
reinvested.
d) None of the above.
Question 2
If yield-to-maturity (YTM) is greater than the coupon rate (CPN)
of a bond, then the bond price will be:
a) Greater than par or face value.
b) Less than par or...

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