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Investment Propositions - Bonds/Risk-Standard Deviation

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7. A one-year zero coupon bond has a yield to maturity of 4 percent and a two year zero-coupon bond has a yield to maturity of 5 percent. A 6 percent coupon bond with annual payments, par value of $1,000 and two-year maturity should trade at what price in the absence of arbitrage opportunities?

8. Suppose that you have $1 million and the following two opportunities from which to construct a portfolio: (1) a risk-free asset earning 12% per year and (2) a risky asset with an expected rate of return of 30% per year and a standard deviation of 40% per year. How can you construct a portfolio with a standard deviation of 30% and what will be tis expected rate of return?

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This solution shows how to calculate bond returns and risk from standard deviation.

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