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Questions and Answers
What is the significance of the left boundary of the feasible set in portfolio theory?
Which type of investor is primarily interested in minimizing variance while maximizing return?
What characterizes portfolios that lie on the efficient frontier?
In the context of portfolio optimization, what does the symbol $r̄$ signify?
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What assumption is made regarding weights in the portfolio when allowing short selling?
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Which of the following statements is true about the relationship between risk-averse investors and the minimum variance point?
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What does the term 'join' refer to when discussing arbitrary pairs of points in portfolio theory?
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What effect does fixing the standard deviation of the portfolio return have on investors' preferences?
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What is the main advantage of inflation products in relation to interest rates?
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Which index is primarily used in the Euro zone for inflation measurement?
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What characterizes a perpetual annuity?
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How is the present value of a perpetual annuity calculated with a per-period interest rate?
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What happens when interest rates are continuously compounded in calculating the price of a perpetual annuity?
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What is an example of a perpetual annuity that was commonly found in the UK?
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Which statement concerning fixed-income instruments is correct?
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What is the significance of the cash flow being linked to an inflation index such as the CPI?
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What does the yield to maturity represent for a bond?
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How is the price of a bond (P) calculated according to the formula provided?
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What effect does maturity (T) have on the bond price's sensitivity to interest rate changes?
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What is the formula for calculating the future value of a cash flow stream in an ideal bank?
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What is the definition of duration in the context of fixed-income instruments?
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How is the present value of a cash flow stream calculated?
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What does the internal rate of return (IRR) represent in relation to a cash flow stream?
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In the absence of coupon payments, what is the price of a bond with a continuously compounding rate?
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Which statement about ideal banks is correct?
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What happens to the price of long-dated bonds when interest rates change?
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What determines the weighting coefficients in the duration calculation?
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What is the role of the variable r in financial calculations described?
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When determining the internal rate of return, what equation must be satisfied?
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If a bond pays $c$ in coupon payments and has a yield $R$, how is this reflected in the bond pricing formula?
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What complicates the analysis of real banks compared to ideal banks?
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Why is the internal rate of return not defined based on the prevailing interest rate?
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Why should the price of a perpetual annuity decrease as the interest rate increases?
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What is the expression for the present value of a finite payment stream given a fixed interest rate r?
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What happens to the present value of an annuity when the interest rate is allowed to vary over time?
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In the case of a constant interest rate, which expression is equivalent to the present value of an annuity?
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What is the integral form used to calculate the present value of an annuity with interest rate r varying over time?
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How does a higher interest rate impact the future value of annuity payments?
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What implications do interest rate dynamics have on the pricing of annuities?
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Study Notes
Portfolio Theory
- The join of two points in a feasible set never crosses the left boundary.
- The left boundary of a feasible set is called the minimum variance set.
- Minimum variance portfolios minimize risk.
- Investors are risk-averse when they prefer portfolios that minimize variance.
- Risk-seeking investors accept higher potential variance for higher returns.
- The efficient frontier is the upper-left portion of the feasible set.
- The Markowitz model finds minimum-variance portfolios.
- The model assumes short-selling is possible.
- The mean portfolio return is fixed and then variance is minimized.
Financial Markets and Derivative Pricing
- Ideal banks have equal deposit and loan rates and no transaction fees.
- Future value of cash flow is calculated by compounding each cash flow forward.
- Present value of cash flow is calculated by discounting each cash flow back.
- The internal rate of return (IRR) is the rate that makes the present value of a cash flow equal to zero.
- Pension benefits often come in the form of annuities.
- Inflation-linked products use inflation indices like the consumer price index (CPI) to adjust payments.
- Perpetual annuities are a series of fixed payments that continue indefinitely.
- Consoles are UK government bonds that pay a fixed amount forever.
- The price of a perpetual annuity is the fixed payment divided by the interest rate.
- The price of an annuity with a finite lifetime decreases as the interest rate increases.
- The price of an annuity with a varying interest rate is calculated by integrating the present value of each cash flow.
- Yield to maturity is the internal rate of return of a bond at the current price.
- The price of a bond is determined by the face value, coupon payments, yield to maturity, and time to maturity.
- Long-dated bonds are more sensitive to interest rate changes than short-dated bonds.
- The duration of a fixed-income instrument is the weighted average of the times that cash flows are made, with weights based on the present values of each cash flow.
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Description
This quiz covers essential concepts in portfolio theory, focusing on risk minimization and the efficient frontier. It also delves into financial markets, including the valuation of cash flows and the internal rate of return. Test your understanding of these fundamental financial principles.