Question

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Which of the following statements about bonds is TRUE? . A. If a $1,000 bond with an annual coupon of $100 is selling at a discount, its YTM is greater than 10%. • B. If nothing else changes, a discount bond's price will tend to decrease as the bond matures. • C. If a premium bond's price decreases, its YTM will decrease too. • D. A premium bond with a coupon rate of 5%, has a YTM greater than 5%. • E. If a discount bond's YTM decreases, its price will decrease too. Which of the following statements is FALSE? • A. Risk averse investors must be compensated with lower expected returns if they are to hold risky assets. . B. An efficient portfolio contains only diversifiable risk. . C. All of the other answers are FALSE. . D. The returns from continually investing in US Treasury bills over the period 1926 to 2012 would be significantly higher than the returns of continually investing in a portfolio of the stock of large US firms. • E. The total risk of an investment is measured by the beta of its returns. Which of the following statements is FALSE? • A. The risk of Elon Musk being banned by the SEC from managing a US company is an example of a diversifiable risk. . B. Market risk can be eliminated by diversification. . C. There is a risk reduction benefit of diversification when the returns of two assets are uncorrelated (the correlation coefficient is equal to zero). • D. The impacts of COVID-19 are an example of a market risk. • E. The impact of the policies of a potential President Bernie Sanders is an example of systematic risk.

Answer 1

• Which of the following se of the following statement about bond is the . . . . . . $100 is selong at discount ! 27 $lood bond with an annual Coupon 07 its YTM is greater than 10% And Explanation: bond is sold at discount it yamet /Y7M > Discount rate of bond. Discount rate of $1000 bond = bobond & $100 x 100 = 10% $1000* t this bond is selling at discount rate : 4 IM> Dibeo If this bond is selling at YTM, which is greater than discount a rate, then bond is selling at discount. Therefore (A) is correct (True). B) It nothing else changes, a discount bond's price will tend to dedicase as bond natures. O p Bond sold at premium. . ) ) ) Price Pale price. Bond sold at discount 0 Maturity

• from the graph, we can observe that jy nothing eke change them . a discount bond price increases aus 4 reaches matweity. Therefore, (B) is Jose • (c) Apremium bond If a premium bond price increases, decreases, • it YTM wo19 decease too. - Bond price and y TM has inverse relationship - Whether it is a premium bond or discount bond the a • bond price and Y9M has inverse relationship • It a premium bond price decreases, its you increases. Eherefore, cc) is take. ) Apremium bond with coupon rate of 5%, has y TM great be than • 5% For a premium bond - / Discount rate > YTM. / Apremium bond with coupon rate of sºl, has y 7M less than som Therefore, CD) is fake.

If a discount bond's y TM dschbears of price will decheats too, As explained in co, the bond price is inversely related to a YIM. cccceee . If a discount bond's yeu decreases, its price will increase Therefore (E) is fake . - Therefore, the correct option is (A. Which of the following statement is FALSE? A) Risk ardhse Bruktors must be compensated with lower expected retulins if they hold risky assets. . Explanation In gonchal, Risk avotse Prves toys must be ompensated with greates expected expreh wins if they hold risky assets. Therefore (A) is tase. B) An effe font portfolio Containing divifo contains only diversifate risk. Explanation

• Aeolidik portfolio is called wing expected vehicles of thook ondº Standatel An eft went port toleo is calculated using Reek and return formada • provided by the macko wita modelo • Makkywortz did not consider syskomakie visk of shook to alentata • Portfolio nisk and retulino Di Markowita , considered diversifiable rise to calculate portfolia risk and retulin • Therefore, effrent portfolio contains only diversifiable risk. • Therefore, (B) is true .(C) All of the answers are FALSE . . (B) is true. Let us check other options - (D) The retulons from Continually inveshing in vs Treasury bills over a • the period 1926 to 2012 would be significantly higher than the e retulns of Gan kimialy Snvesting in a portfolio of skook of latge us o firms. Explanation: Generally, blocks provided higher retulers ovde long periodo time, when Impaled to any other asset class. •

Therefore (D), is faber - E) The total Risk of an measurement investment is measured by The total Rize of beta of its ret whers. Explomation. DO Beha measures systematic risk but not hozal risk. total risk in an investment is measured by Standard deviation of return of an investment . horepore (B), is fake. *3) Which of the folboing statiments is fake? (4) The risk of Elon Musk bong banned by SEC from managing a • • Us Company is an example of a diversi fieble risk. - Explanation Diversifiable risk is firm specific risk. Ranning Elon Mak • from managing a us compony is firm specific risk. This risk can be diversified by investing in other shooks. Therefore CA is time

Therefore (D), is faber - E) The total Risk of an measurement investment is measured by The total Rize of beta of its ret whers. Explomation. DO Beha measures systematic risk but not hozal risk. total risk in an investment is measured by Standard deviation of return of an investment . horepore (B), is fake. *3) Which of the folboing statiments is fake? (4) The risk of Elon Musk bong banned by SEC from managing a • • Us Company is an example of a diversi fieble risk. - Explanation Diversifiable risk is firm specific risk. Ranning Elon Mak • from managing a us compony is firm specific risk. This risk can be diversified by investing in other shooks. Therefore CA is time

Furabice with and a a and asset classes ®) Market Fisk can be liminated by olivesitilation Explanation Marbet risk is also called as systematic re r all the forms Systematic risk affects the • Systematic risk cannot be dvorei tied. • Therefore (B) is take. (C) Phone is nisk reduction benefit of diversification when • retwins of two assets are uncorrelated • Explanation . According to Markowite portfolio theory. 1. Risk = /10,2 0,² +0² or 42 81 228,82]} Oude - Risk of shocks Willa - Asset allocation of shock • r- correlation. co-effiient • g7 stocks stock ret wens are not co-related, p=0 .. "The portfolio has visk-reduction benefit. • Therefore, (c) is true

• D. The im le impacts of Corld-19 is an example of market risk • Explanation The COVID 19, has affected all the industries. Since it has affected - affect of Coriola is macro-economic.. is an example of market risk. affect of 1.6. Therefore, I is time E. The impact of policies of a potekal Pesident Belenie bandous is an examples of systematic risk. . . Explanation . • . Any Government pobry will have made-economic affects • The policies might affect all the industries. This an example of systematic risk. Therefore, (E) is true. • Final answers. t. A True • ADI False • B - False