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Calculate the portfolio duration

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Reference no: EM132805042

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Q1. An investor wishes to construct a portfolio consisting of Stock A and Stock B. The expected returns on the two stocks A and B are 10 percent and 15 percent, and the standard deviations of the returns are 20 percent and 25 percent respectively. The correlation coefficient between their returns is -0.5. The investor is free to choose the investment proportions subject to the requirement that the sum of the allocation of funds in stock A (wA) and stock B (wB) is1.

a. Make a representative selection of values for wA from 0, 0.2, 0.4, 0.6, 0.8 and 1 and calculate expected return and standard deviation of the portfolio for each 6 pairs.

b. From the given information, calculate the optimal proportion of funds in stock A and stock B in order to achieve lowest level of risk.

Q2. A portfolio has three bonds namely X, Y and Z. The duration of each bond is 5.5, 7.8 and 12 respectively. The market value of each bond is Rs.6000000, Rs.3400000, and Rs.1535000 respectively. Calculate the portfolio's duration.

Q3. Suppose the stock of Intel is trading at $50. A put option contract with a strike price of $55 expiring in a month's time is being priced at $2.50. You believe that Intel stock will fall sharply in the coming weeks and so you paid $250 to purchase a single Intel put option covering 100 shares.

a. What will be your net profit if the price of Intel crashes to $40 at expiration date?

b. What will be your net profit if the price of Intel rallies to $60 at expiration date?

Reference no: EM132805042

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