Question: A) Assume that stock returns follow a 2-factor structure. The risk-free return is3%. Portfolio A has average return 8% and factor-betas 0.7 and 0.9 (for

A) Assume that stock returns follow a 2-factor structure. The risk-free return is3%. Portfolio A has average return 8% and factor-betas 0.7 and 0.9 (for factor 1 and 2, respectively). Portfolio B has average return 10% and factor-betas 1.2 and 1.1 (for factor 1 and 2, respectively). What is the average return for portfolio C that has factor-betas 1 and 1 (for factor 1 and 2,respectively)?

B) A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5%(coupon paid in arrears annually) has yield-to-maturity 4.5%. What is the convexity of the bond?

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