Assume that you recently
Assume that you recently
Assume that you recently graduated and landed a job as a financial planner with Cicero Services, an investment advisory company. The Client presently owns a bond portfolio with $1 million invested in zero coupon Treasury bonds that mature in 10 years. (The total par value at maturity is $1.79 million and yield to maturity is about 6%, but that information is not necessary for the mini case.) You have calculated the rate of return on 10-year zero coupon for each scenario.Scenario Probability Return on a 10-year Zeroof Scenario Coupon During the next yearWorst Case 0.10 -14%Poor Case 0.20 -4%Most Likely 0.40 6%Good Case 0.20 16%Best Case 0.10 26%Historical Stock ReturnsYear Market Blandy Gourmange1 30% 26% 47%2 7 15 -543 18 -14 154 -22 -15 75 -14 2 -286 10 -18 407 26 42 178 -10 30 -239 -3 -32 -410 38 28 75Average 8.0% ? 9.2%ReturnStandard 20.1% ? 38.6%DeviationCorrelationWith Market 1.00 ? 0.678Beta 1.00 ? 1.30The Risk Free Rate is 4% and the market risk premium is 5%