1) Consider the market where the lending risk-free rate is 2% and borrowing risk-free rate is 5%. Michael and Meryl have the positions in AC stock and T-bills. They do not trade any other securities. Michael lends 40% in his optimal complete portfolio and Meryl borrows 20% in her optimal complete portfolio.The coefficients of risk aversions of Michael and Meryl are 6 and 2, respectively.What are the expected rate of return and the standard deviation of the rate of return of AC stock?

a.

E(r)=15%, r=25%

b.

E(r)=9%, r=24%

c.

Cannot be determined

d.

E(r)=11%, r=15.8%

e.

E(r)=12%, r=18.3%

2)You are managing a bond portfolio of $1 million. Your target duration is 15 years and you choose from the two bonds: a zero-coupon bond with maturity in 5 years and a zero-coupon bond with maturity in 20 years. How much you invest in each bond?

a.

333,333$ in 5-year zero coupon bond and 666,667$ in 20-year zero coupon bond

b.

200,000$ in 5-year zero coupon bond and 800,000$ in 20-year zero coupon bond

c.

666,667$ in 5-year zero coupon bond and 333,333$ in 20-year zero coupon bond

d.

250,000$ in 5-year zero coupon bond and 750,000$ in 20-year zero coupon bond

e.

857,143$ in 5-year zero coupon bond and 142,857$ in 20-year zero coupon bond