1. A 5-year bond with face value $1,000 (paid at maturity) and coupon rate 5%
(coupon paid in arrears annually) has yield-to-maturity 4.5%. What is the
convexity of the bond?
2. Assume that stock returns follow a 2-factor structure. The risk-free return is
3%. Portfolio A has average return 8% and factor-betas 0.7 and 0.9 (for
factor 1 and 2, respectively). Portfolio B has average return 10% and factor betas 1.2 and 1.1 (for factor 1 and 2, respectively). What is the average
return for portfolio C that has factor-betas 1 and 1 (for factor 1 and 2,