Immunization is intended to protect a portfolio against interest rate risk. What should be done? How does it work?

Q: Explain what a “riskless hedge” is and how the riskless hedge concept is used in theBlack–Scholes…

A: Riskless hedging: It is the process of buying the stock as well as sell call options simultaneously…

Q: How is the risk-adjusted discount-rate approach more commonly practiced in the real world?

A: Risk adjusted discount rate approach is an approach which is used in assessment of various long-term…

Q: Discuss the following statement: “It is possible to hedge a portfolio against any state of nature if…

A: People usually use strategies like diversification, Putting stop losses, principal protected notes…

Q: If you introduce a risk free asset in your portfolio of risky assets; how will this change the shape…

A: In any portfolio there are two types of risk; risk from general market conditions and risks from…

Q: What does vega measure? What can you tell from vega value? Can the vega of a derivatives portfolio…

A: Option gives right to buy or sell an underlying asset to the buyer of the option at strike price. A…

Q: What is an equivalent process of a money market hedge? Why?

A: Money market hedge A technique of utilizing the money market that has high liquidity, as well as…

Q: How does the creation of a portfolio reduce risk? What type of assets should be included in a…

A: Introduction Portfolio: Any combination of financial assets, such as stocks, bonds, and currency, is…

Q: What is the expected return on a portfolio? How can the expected return on a portfolio be…

A: Expected Return on Portfolio  =( Weights of Stock 1 * Return of Stock 1) + ( Weights of Stock 2 *…

Q: 1. In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it…

A: Unsystematic risk is a risk that is distinctive to a particular firm or industry. Nonsystematic risk…

Q: What is a replicating portfolio, and how is it used to find the valueof a derivative security?

A: Portfolio is a collection of investments held by an investor. Replicating portfolio is a financial…

Q: Differentiate between (a) stand-alone risk and(b) risk in a portfolio context

A: Investors can categorize the risks in two types. One is diversifiable risk and other one is…

Q: xplain the difference between (a) stand-alone risk and (b) risk in a portfolio context. How are they…

A: Stand-alone In terms of how they are calculated and analyzed, risk and portfolio risk are not the…

Q: How does the emergence of interest-rate risk helpexplain financial innovation?

A: Interest rate risk is defined as the risk that is faced by the bond holders because of the changing…

Q: Critically discuss the effect of diversification on portfolio risk. Is there any limit of…

A: A portfolio is the mixture of securities managed by the portfolio manager. We can take the amount in…

Q: Discuss the difference between Systematic Risk and Unsystematic Risk. What kind of strategies we can…

A: Risk in finance is the situation that may or may not arise in the future and has an impact on the…

Q: Why does standalone risk differ from portfolio risk? Explain and give examples! Relates your answer…

A: While making an investment, an investor is required to thoroughly examine all types of risks and…

Q: Describe how a risk-free hedge portfolio can be created using stocks and options.

A: A risk-free hedge portfolio can be created by the usage of stocks and options by the following…

Q: What is the expected return on a portfolio? How can the expected return on a portfolio be…

A:

Q: Compare long-term instruments and short-term risks, in terms of the various types of risk to which…

A: Interest rate risk is the likelihood that the value of a fixed-rate debt instrument may fall when…

Q: In today’s low interest rate environment and economic uncertainty, what bond duration strategy would…

A: Bond portfolio management strategies can help investors get the most of their portfolio, by actively…

Q: What does immunization using factor durations allow the bond portfolio manager to do that cannot be…

A: Bonds are called bond goods because they typically pay a set interest rate to the borrower (coupon).…

Q: Define the real risk-free rate (r*). What security canbe used as an estimate of r*? What is the…

A: Answer: Real risk-free return: Real risk-free return is nothing but a minimum rate of return…

Q: What is hedge portfolio?

A: Hedge portfolio It consists of the long position in a security i.e stock and also the long position…

Q: Identify and explain the various types of financial instruments used in optimal risky portfolio…

A: Optimal risky portfolio: The Optimal Risky Portfolio is the portfolio on the efficient frontier with…

Q: How does the diversification of an investor’s portfolio avoid risk?

A: Portfolio investments mean investments in the group of assets, securities, bonds, etc. Investments…

Q: Describe how a risk-free hedge portfolio can be created usingstocks and options

A: Hedging: The transaction that deceases the risk of the firm that can take place due to fluctuations…

Q: Describe how a portfolio manager may help to mitigate the impact of these risks on portfolio.

A: Portfolio manager is the individual or the group of people who is professional in his field,…

Q: Discuss the role of risk-free assets in the Markowitz Portfolio Theory.

A: Harry Markowitz always focused on lowering the risk and diversification in order to maximize the…

Q: 1. What are the two most important inputs one needs in order to model default risk within their…

A: Default risk refers to the uncertainty surrounding a company's capability to pay off its debts…

Q: Why we need tocalculate valuation of securities and yield to maturity of a security?

A: One of the important decisions that should be taken by the investor is to the valuation of security,…

Q: How does one asset in the same portfolio influence the other one in the same portfolio? And what…

A: A portfolio is the collection of securities managed to get systematic returns and maximize the value…

Q: Explain risks in Portfolio?

A: Introduction: Risk is nothing but a potential for emergence of unexpected occurrences. There is…

Q: Which of the following types of investment carries the greatest risk? O Stocks O Bonds O Mutual…

A: Option Explanation Stock Iit is risky because it depends on movement of market. Bonds Bonds have…

Q: What type of security can be used to minimize both price risk and reinvestment riskfor an investor…

A: The term price risk refers to the increase or decrease in the price of the bonds as a result of…

Q: understand the importance of weighting securities in a portfolio?

A: Answer: Portfolio weights are the percentage of a portfolio’s total value that is invested in a…

Q: Is there a relationship between risk and return in building an effective portfolio?(explain

A: Portfolio management involves prioritization, selection and control of projects and programs of an…

Q: Define Arbitrage (risk-free) portfolio

A: An arbitrage portfolio is a portfolio with zero factor risk - all the factor sensitivities are equal…

Q: Interest rate swap is widely used by portfolio managers. Describe an example of how a manager can…

A: Forward contracts are the one wherein one circulation of future interest payments is swapped for the…

Q: Explain portfolio risk

A: Portfolio risk reflects the overall risk for a portfolio of investments. It is the combined risk of…