8006 Exam Dumps : Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

When assets are uncorrelated, variances are additive. But volatility (which is standard deviation) is not. In the given situation, the total variance of the portfolio will be equal to the the square root of the sum of the variances of the assets in the portfolio weighted by the square of their weights. Its volatility will be the square root of this variance. Thus Choice 'c' is the correct answer.

(This is because V(cA + dB) = c^2 V(A) + d^2 V(B) - refer tutorial on combining variances.)

Choice 'a' is incorrect as it describes the calculation of variance, not volatility. Also, the presence of a large number of uncorrelated assets does not create a portfolio with volatility equal to zero or that of the market. The other choices are therefore incorrect.

The duration of a perpetuity is 1/running yield. Therefore the correct answer is 1/.05 = 20 years

The all in price would be equal to the clean price plus accrued interest. The accrued interest for the 60 days that have passed since the last coupon payment is $5 x 60/360 = $0.83. Therefore the dirty price, or the all in price, will be $98.83. (Note that the $5 is the annual 5% coupon on the $100 face.)