Exercise 12

You observe the following yield curve (i.e. term structure of interest rates):

y1 y2 y3 y4 y5
0.016 0.025 0.031 0.036 0.039

Calculate the following implied values:

a) The whole discount structure of zero bonds.

b) The swap rate for 1 year and for 2 years (2 calculations).

c) The forward rates 2 F3 , 2 F5 , 4 F5 .

Exercise 13
Consider the following two assets:

µ σ
Asset A 18% 18%
Asset B 6% 20%

Correlation between A and B is -0.1. The risk free rate is 3%.

a) Compare both assets in a µ − σ diagram. Which asset is efficient, which is not?

b) What is the µ−σ combination of a portfolio where the weight of asset A is w = 1.6?
Show your calculations! Give a clear interpretation of your result!

c) Assume the standard deviation of the market portfolio is σm = 12%. The beta of
asset A is βA = 1.2, derived by a linear regression model. Calculate the values of
the systematic variance and the unsystematic variance of asset As return variance.

d) Depict in a weight diagram (x-axis is the weight of asset A and y-axis is the weight
of asset B) all (i) possible and (ii) efficient portfolios, given that only asset A could
be sold short. Calculate the minimum risk portfolio (show your calculations!) and
mark this portfolio in your weight diagram.