1. Why an asset allocation optimization can’t be performed in a risk neutral environment?

(1pt)
2. Markovitz and Sharpe is following which principle? (1pt)
3. Let the following portfolios:
a.

Poids Rendement Risque

Stock 5% 3,5% 30%
Real Estate 5% 2,9% 20%
Corporates bonds: Rating 15% 1,5% 10%
AAA
Corporates bonds: Rating 25% 2% 15%
BBB
Government bonds 50% 0,5% 5%
b.

Poids Rendement Risque

Stock 2% 3,5% 30%
Real Estate 9% 2,9% 20%
Corporates bonds: Rating 20% 1,5% 10%
AAA
Corporates bonds: Rating 20% 2% 15%
BBB
Government bonds 49% 0,5% 5%

Let say that these two portfolios are on the Markowitz and Sharpe frontier and each assets class
are correlated at 50% between them:
 Calculate the yield for each portfolio. (1pts)
 Calculate the risk for each portfolio. (1pts)
 Give me the reason of your best portfolio that you would like to invest. (1pts)

4. Let the following bond:

 Notional: 100
 Maturity: 10years
 Coupon: 2%
 Market Value: 100$
 Sensitivity Up (+1%): 91.5$
 Sensitivity Down (-1%): 109.5$
a. Calculate the average duration of this bond (called “McCauley” duration). (1pt)
b. Calculate the duration by sensitivities of this bond (Called “Modified” duration) (1pts)

5. The customer needs $1.02M dans 10 years. The current market value is €0,84M for 2% market
yield
I have the possibility to invest in:
 Case 1: A 0 coupon 11 years duration.
 Case 2: A 0 coupon 5 years duration.
a. Calculate the notional in each case. (1pts)
b. With which bond you will be hedged against an Interest rate increase of 1%? What
would be my gain? (1pts)
c. If the Interest rate drops by 1%, would you be still hedge with the bond selected
above? if no, give the reason. (1pts)