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

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

60.1K

Verified Solution

Question

Finance

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

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.) (9 marks)

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 fundseeks 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? (9 marks)

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

Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies...

Basic Math
1.2K views

A washer and a dryer cost $750 combined. The cost of the washer is two...

Calculus
1.2K views

Calculate the derivative of the function h t 5 t 6 F t Express numbers...

Algebra
1.2K views

2 9 8 7 6 Domain Range Intervals of Increase Intervals of Decrease Maximum 24...

Algebra
1.2K views

Given right AABC MZA mzC mZB 90 O b a 5 2 c 11 1...

Algebra
1.2K views

(Solving, Simplifying) In College Algebra, you learned the at the Quadratic Formula is x =a)...

Algebra
1.2K views

1 Solve 2 3 4 w 17 5 If all real numbers are solutions click...

Accounting
1.2K views

Use the following information: The balance in retained earnings at December 31, 2011...

Accounting
1.2K views

Management of Mittel Company wants to reduce the elapsed time from when a customer places...

Accounting
1.2K views

A family friend has asked your help in analyzing the operations of three anonymous companies...

Accounting
1.2K views

Even with the most complex worksheets, a primary goal is to ensure that the end-user...

Accounting
1.2K views

Grocery Corporation sold $540,000,8 percent notes on January 1 of this year at a market...