question 1 Part A and B

Question to part A and B

Instruction: In problems which ask you to calculate something, first write out the appropriate formula and then fill in the relevant information that is used to calculate the answers. If you use the time value of money functions of a financial calculator, write down the inputs you use to arrive the answer. If you use the correct formula and fill in the correct information, you will receive partial to full credit; on the other hand, answers that do not show how you arrive at the final answer will receive little or zero credit. Points for each question are indicated. 1. [10 Points With the Federal Reserve's monetary stimulus programs, inflation is ex- pected to be 6% in Year 1,8% in Year 2, and back to the normal level of 3% thereafter. Suppose the yield on a 8-year Treasury note is 11%. (a) What is the yield on a 8-year Treasury Inflation Protected Security (TIPS)? (b) Suppose the yield on a 8-year corporate bond is 16%, and its liquidity premium is 1.50%, what is its default risk premium? 2. [10 Points] Suppose CAPM holds. The beta of Stock X is 2.00, and the variance of X is 0.25. The correlation between X and the market portfolio is o/s4. The covariance between Stock Y and the market portfolio is 0.02. (a) What is the standard deviation of the market portfolio? (b) What is the beta of Y