Question

Q1: What’s the term structure of interest rate? What’s yield curve? Could you use mortgage rates to explain the theory?

Q2: How to compute the expected return and the risk (standard deviation) for a two-stock portfolio?

Q3: In CAPM, what’s beta? What kind of risk is the beta used to measure? How to calculate an individual stock’s beta based on its definition?

Answer 1

1. Term structure of interest rate is reflection of yields of short term bonds and long term bonds along with different maturity of the bonds.

Term structure reflects that how the bonds yield are going to change in relation to their overall duration.

Yield curve is plotting of bond yields of different maturity.it is used to plot the variation of different yields and then the inferences are drawn from that it flat yield curve will reflect no change in the overall bond of different maturity and inverted yield curve will represent that short term Bond yields are higher than long term Bond yields, where normal curve would reflect that long term Bond are higher than short term Bond yields.

Mortgage rates can be used to explain it as as mortgage rates are different for different maturity and it is usually a reflection of different rate of interest in the economy so when there is normal yield curve, the mortgage rate of longer period would be higher and the mortgage rate of shorter period would be lower.