Question 1
Zero coupon bonds pay no coupons at all but are offered at their par values and hence provide capital appreciation rather than interest income.
◦ true
◦ false
Question 2
A highly risk-averse investor is considering adding one additional stock to a three-stock portfolio, to form a four-stock portfolio. The three stocks currently held all have b = 1.0 and a perfect positive correlation with the market. Potential new Stocks A and B both have expected returns of 20%, and both are equally correlated with the market, with r = 0.80. However, Stock A’s standard deviation of returns is 11% versus 15% for Stock B. Which stock should this investor add to their portfolio, or does the choice matter?
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either A or B, i.e., the investor should be indifferent as to which of the two
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Stock A
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Stock B
◦
neither A nor B, as neither has a return sufficient to compensate for risk
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