The stock’s expected return, standard deviation, and coefficient of variation. Portfolio: The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by investors and financial users. A portfolio is constructed in accordance with the risk tolerance and the objectives of the company. Expected Return on Stock: The expected return on stock refers to the weighted average of expected returns on those assets which are held in the portfolio. Standard Deviation: The standard deviation refers to the stand-alone risk associated with the securities. It measures how much a data is dispersed with its standard value. The Greek letter sigma represents the standard deviation. Coefficient variation: The coefficient of variation is a tool to determine the risk. It determines the risk per unit of return. It is used for measurement when the expected returns are same for two data.

Question

An insurance company has liabilities of £7 million due in 10 years' time and £9 million due in 17 years' time. The assets of the company consist of two zero-coupon bonds, one paying £X million in 7 years' time and the other paying £Y million in 20 years' time. The current interest rate is 6% per annum effective. Find the nominal value of X (i.e. the amount, IN MILLIONS, that bond X pays in 7 year's time) such that the first two conditions for Redington's theory of immunisation are satisfied. Express your answer to THREE DECIMAL PLACES.

Answer 1

Question

Chapter 8, Problem 1P

Summary Introduction

To determine: The stock’s expected return, standard deviation, and coefficient of variation.

Portfolio:

The portfolio refers to a group of financial assets like bonds, stocks, and equivalents of cash. The portfolio is held by investors and financial users. A portfolio is constructed in accordance with the risk tolerance and the objectives of the company.

Expected Return on Stock:

The expected return on stock refers to the weighted average of expected returns on those assets which are held in the portfolio.

Standard Deviation:

The standard deviation refers to the stand-alone risk associated with the securities. It measures how much a data is dispersed with its standard value. The Greek letter sigma represents the standard deviation.

Coefficient variation:

The coefficient of variation is a tool to determine the risk. It determines the risk per unit of return. It is used for measurement when the expected returns are same for two data.

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