1. The price of a 1-year zero coupon bond is 97% of the face value, the prices
of corresponding 2-year and 3-year bonds are 96% and 91%, respectively.
You are offered an opportunity to borrow $1m in year 1 (one year from now).
The loan requires annual coupon payments of 4% of $1m in years 2 and 3,
and you must repay the capital of $1m in year 3. Should you accept this
offer?
2. The Sharpe ratio and Jensen’s alpha of portfolio A are 0.10 and 0.004,
respectively. The risk-free rate is 3%, the average return on the market
portfolio is 7%, the variance of the market portfolio is 0.09, and the
correlation coefficient between A and the market portfolio is 0.7. What is the
expected return and the variance of A