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question 3

Multiple Choice

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Investiment } A$ $\quad$$\quad$$\quad$$\quad$$\quad$$\text { Investment } B$
$\begin{array}{|l|l|l|l|l|}\hline & \text { Good year } & \text { Bad year } & \text { Good year } & \text { Bad year } \\\hline \text { Probability } & 0.80 & 0.2 & 0.90 & 0.1 \\\hline \text { Pay-off } & 140 & 45 & 110 & 70 \\\hline\end{array}$
-The key factor in asset choice is the effect of the additional asset on the existing portfolio.To calculate the change in portfolio variance and expected return with an additional asset,what does the investor require?

• A) Expected return of the new asset
• B) Its variance
• C) The covariance between the new asset and the other assets in the existing portfolio
• D) All of these choices

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Definitions:

Coupon Rate

The interest rate stated on a bond at the issuance time, which the issuer promises to pay to the bondholder on the face value of the bond.

Coupon Yield

The per annum rate of interest a bond delivers, depicted as a proportion of its par value.

Yield to Maturity

The complete earnings projected from a bond assuming it is retained up to its expiration date.

Yield to Maturity

The total return anticipated on a bond if it is held until it matures, incorporating all coupon payments and the face value received at maturity.