On December 31^st, 2013, you decided to buy a 40-year Government of Canada bond. The bond had a face value of $100,000. The annual coupon rate on the bond was 5.40%. Coupons were paid semi-annually. On December 31^st, 2013 the yield to maturity on Government of Canada bonds was 4.70% per year. (The term structure of interest rates was flat.)

After holding the bond for 10 years you decided to sell the bond on December 31^st, 2023. Prior to selling the bond you received the December 31^st, 2023 coupon payment. On December 31^st, 2023 the yield to maturity on Government of Canada bonds had decreased to 3.30% per year. (The term structure of interest rates was flat.)

2. How much did you pay for the bond on December 31st, 2013?
4. How much did you sell the bond for on December 31st, 2023?
6. What was the effective periodic rate of return that you earned on your investment during the 10 years?
8. What was the effective annual rate of return that you earned on your investment during the 10 years?

You work for a large investment management firm. The analysts with your firm have made the following forecasts for the returns of stock A and stock B:

	Probability	Stock A	Stock B
Very Weak	15%	40%	-30%
Weak	20%	20%	-20%
Somewhat Weak	25%	18%	15%
Somewhat Strong	20%	10%	20%
Strong	15%	-20%	30%
Very Strong	5%	-80%	60%
	100.0%

2. Calculate the expected returns, variances and the standard deviations for Stock A and Stock B.
4. What is the covariance of returns for Stock A and Stock B? What is the correlation coefficient between the returns of Stock A and Stock B?
6. What is the expected return and standard deviation of a portfolio where 30% of the portfolio is in stock A and 70% of the portfolio is in stock B?
8. Create a table (like the one shown below) that has the expected return and standard deviation for different weights in each stock. This can be done using an excel data table. Start with 100% in A and zero in B, and increments of 10%, complete the table. The last row, will have 0% in A and 100% in B.
10. Based on your table, create a chart (or graph) with your results.

Weight in A	Weight in B	Portfolio expected return	Portfolio standard deviation
100%	0%
90%	10%
80%	20%
70%	30%
60%	40%
50%	50%
40%	60%
30%	70%
20%	80%
10%	90%
0%	100%

Note: All calculations should be rounded to one decimal place if you are using percentages. If you are using decimals, the answer should be rounded to two decimal places.

Answer rating: 100% (QA)

Lets break down each part of the problem step by step 1 Price of the bond on December 31st 2013 Well calculate the present value of the bonds cash flows using the given yield to maturity YTM of 470 2 ... View the full answer