Semiannual reset period on floating leg

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Reference no: EM131905406

1. Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT?

A. If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%.

B. If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's required return will increase by more than 2%.

C. The required return on the market is 10%.

D. If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the market, which is 11%.

E. The portfolio's required return is less than 11%.

2. A manager of a $40 million dollar fixed-income portfolio with a duration of 4 wants to increase the duration to 7. The manager chooses a swap with a semiannual reset period on the floating leg and a duration of 5 on the fixed leg. The manager should become a:

A. pay-floating counterparty in the swap with a notional principal of $26,666,667.

B. receive-floating counterparty in the swap with a notional principal of $26,666,667.

C. pay-floating counterparty in the swap with a notional principal of $ $25,263,158.

D. receive-floating counterparty in the swap with a notional principal of $15,238,095

Reference no: EM131905406

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