a) Stock 1 has a variance of 30% and stock 2 has a variance of 45%. The covariance between the two stocks is zero. What is the variance of a portfolio with 20% invested in stock 1 and 80% invested in stock 2?
b) Bravo is bidding for a property. In a year's time, the property will be valued at either $20,000 (with a probability of 0.4) or $30,000 (with a probability 0.6). Bravo has an initial wealth of $50,000. Bravo's utility is given by the natural logarithm of final wealth. Calculate the maximum price Bravo
c) The covariance between the asset and the market is 4%. The risk-free rate is 2%. The market risk premium expected return is 2% with a standard deviation of 12%. The asset standard deviation is 20%. Calculate the CAPM expected return of the asset.
d) A bond with a remaining maturity of 3 years has a face value of $100, an annual coupon of 5%, and a yield to maturity of 4.5%. The bond is currently valued at $101.37. What is the modified duration of the bond?
