A friend of yours tells you that in China two year zero coupon U.S. treasury bon
ID: 2778454 • Letter: A
Question
A friend of yours tells you that in China two year zero coupon U.S. treasury bonds, 100 par sell for $95. What is the annualized risk-free rate in this example? You happen to notice the same security can be purchased or sold domestically for $97, how do you arbitrage this position? How many times should you make this trade? How likely is it that your friend’s information is current and correct?
After graduation you decide to start an actively managed fund, the S&P 500 plus. This fund invests in all S&P 500 stocks, but does not use the same weights as the S&P 500 index. A) Before you begin your analysis, you start by collecting the necessary inputs. What inputs do you need for your analysis? What is the total number of inputs that you will need? B)How do you go about constructing the minimum variance frontier of the S&P 500 stocks? How do you find the optimal risky portfolio? C)you announce to your clients that you will not take any short positions in any of the stocks. What restrictions does this place on your investment weights?
Explanation / Answer
You bought a T-bill for $95 and its face value was $100, you would earn $5 interest by the end of the term
So the risk free rate of return would be 5%.