1. a. Derive an expression that relates the M2 ratio to the Sharpe ratio and the market Treynor ratio. (7 marks) b. A 4-year bond has face value 100 (paid at maturity) and annual coupon rate 7% (paid in arrears at the end of the year). The yield-to-maturity is 4%. What is the duration and convexity of the bond? (9 marks) c. You wish to create a financial instrument that has a payoff in 6 months' time equal to the maximum value of $1,000 and $1,000 + $0.2*(S&P Index in 6 months' time -2,200). The current S&P 500 index is trading at 2, 200, and the 6-month call and put options with strike price 2,200 are trading at 200 and 150, respectively. What is the cost of your instrument? (9 marks) (25 marks) 2