Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. 7. a) explain the differences between exchange tra

7. a) Explain the differences between exchange trading and over-the-counter (OTC) trading. ...

90.2K

Verified Solution

Question

Finance

7.

a) Explain the differences between exchange trading and over-the-counter (OTC) trading.

b) Portfolio B consists of 15 stocks, 10 of which have beta 1 and idiosyncratic variance 0.02, and 5 of which have beta 1 and idiosyncratic variance 0.04. What is the minimum idiosyncratic variance one can achieve by investing in these stocks? You should assume that the idiosyncratic risks of the stocks included in B are independent across stocks. (Hint: the portfolio that minimises the idiosyncratic variance has equal weights in stocks with the same idiosyncratic variance.)

c) A pension fund discovers that it must make additional annual pension payments of $1m in years 6 through 10. The current interest rate is 5% and the term structure is flat. The pension fund seeks to hedge the additional liability by investing in two bond portfolios A and B with durations 5 and 15, respectively. The fund must also ensure that the investment in A and B matches the value of the additional pension payments. How much should be invested in portfolios A and B?

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Finance
1.2K views

On February 9, George Jackson and his neighbors, Karen and Steve Devenyn, drafted and signed a...

Finance
1.2K views

A bond with a coupon rate of 7 percent sells at a yield to maturity of...

Mechanical Engineering
1.2K views

A racquetball court is 40 ft long by 20 ft wide by 20 ft high. Express...

Basic Math
1.2K views

A developer wants to know if the houses in two different neighborhoods were built at roughly...

Physics
1.2K views

11 Two identical non conducting solid spheres of same mass and charge are suspended in...

Basic Math
1.2K views

omt P x is the statement x 3 4 Q x is the statement x...

Accounting
1.2K views

What does the queue discipline refer to

Accounting
1.2K views

During 2019 the following selected summary transactions occurred for Zoff Ltd: a) Sales,...

Accounting
1.2K views

Suppose that the relationship between the tax rate t on imported shoes and the total...

Accounting
1.2K views

Shim Company presents its statement of cash flows using the indirect method. The following accounts...

Finance
1.2K views

There is an important commercial lending business that needs to investigate their process yield in...

Accounting
1.2K views

can you make a whole speech on any informative topic with an intro. 3 body...