1.a Explain how you build , construct or design a portfolio in the context of the capital asset pricing model CAPM. Show by way of graph as well.

B) Does your approach in 1A above lead to an efficient portfolio? Explain.

2. Consider the table below showing return & risk for two funds.

Mutual Funds	Returns	Standard Deviation
Fund A : Well diversified value fund	10%	16%
Fund B: A risk less Fund	3.5%	0%

2.A Show risk & return for a security consisting of 60 % in risky fund & 40 % risk less fund. Show calculations.

B )Show return & Risk for a portfolio consisting of 130 % in risky fund in the context of CAPM. Show calculations.

3. Consider data resulting from a regression of security returns on to market index reflecting the market model.

Security	Alpha	Beta
A	-1.5	1.6
B	3.5	0.7

3.A Calculate alpha & beta of a portfolio consisting in 20 % allocation to security A & 80% allocation to security B. Show the resulting single index model equation or market model equation.

B): According to alpha & Beta of the portfolio you have calculated, if the market return is 10 % what would be (calculate) return on your portfolio. (10 points)

4.A Consider the market model as follows (10 Points)

R_{p= p} + b_pR_M + e_p

ShowR² as an formula

B) Assume beta of your portfolio is 0.88, standard deviation is 20 % & standard deviation of market is 16 % . Calculate R².

C)State the range in R^2,and compare your calculated R² in 4 B to the range in R².Is your portfolio very well diversified? Why?

5. Calculate the expected return on a portfolio with the following characteristics in the context of arbitrage pricing theory, APT. Assume risk free return of 3.5 %.

Factors are	Market as factor 1	Size as factor 2	Book to market as factor3
Beta of portfolio	0.75	0.10	-0.06
Risk premium for factors	6%	2%	4%

6. Show your understanding of the role of multi index models based on coverage in class.

7)Assume you can buy abond that has a par value of $1000, matures in 10 years, yielding 6% and has a duration of 5. If you would like to use this bond to form a guaranteed investment contract "GIC" and offer a guaranteed rate of return to investors for certain years.

a. what is the maximum yield you can offer?Why? Explain.

b. For how many years would you make the guarantee? Explain.

8) In considering bonds to buy, assume you have two bonds with the same duration: Bond ONE has a convexity of 10; and bond TWO has a convexity of 5. Which one is better to choose? Explain.

9)In bond portfolio immunization, what are we immunizing the portfolio against? What type of risk are we concerned with?

10)a)How does the bond portfolio cash matched dedicated portfolio strategy work in immunizing a portfolio?

B. What may be the problems of a cash-matched dedicated bond portfolio?

11). A bond with $ 1000 par value is priced to yield 10 %. Its duration is 5 and its convexity is 4 (you can assume a market price of $700).

a) Calculate the change in price of this bond accounting for both duration and convexity at 11 %. State if it would be a rise or a fall in price.

B. Calculate the change in price of this bond accounting for both duration and convexity at 9 %. State if it would be a rise or a fall in price.

12). In managing a pension fund when the balance sheets of the fund consists of bond (present value of the bond) as assets and the present value of the pension benefit payments as liabilities of $100 million. Assume duration of the liabilities is 15.State three conditions that should hold using the duration strategy

13)Describe the laddered and barbell bond portfolio management and explain the difference in assumptions you make regarding each.