Yield curve A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The sun 1. Select the graph that correctly shows the yield curve associated with the data shown in the table. ». Describe the resulting yield curve in part a, and explain what it says about the direction of future interest rates under the expectations theory. 1. Which of the following graphs correctly shows the yield curve associated with the data shown in the table? (Select the best answer below.) A. OC. Yield Curve of U.S. Treasury Securities 16 14- 12- 10- 8 Yield (%) X 6- 4- Yield (%) Yield Curve of U.S. Treasury Securities 16 LE 14- 12- 10- 8 83 6- IN 4 2- 10 15 Time to Maturity (years) 5 10 15 Time to Maturity (years) 20 Q Q G Q Q G OB. O D. Yield Curve of U.S. Treasury Securities 16 14- 12- 10- Yield (%) 8- 6- Yield (%) 4 Yield Curve of U.S. Treasury Securities 16‒‒‒‒ HIFFE 14- 12 10+ 8- 6- 10 15 Time to Maturity (years) 4- 2- 10 15 Time to Maturity (years) 20 Q G Q Q G

A normal yield curve a.has an upward slope b.is a sign of a coming recession c.indicates that the interest rate will decrease in the future  d.All of the above.

You are given the following partial covariance and correlation tables from historical data: Securities J K Market Securities J K Market 1.24 1.11 1.17 1.03 Covariance Matrix K 0.90 J 0.0020480 0.0021600 Also, you have estimated that the market's standard deviation is 4.3 percent. For the coming year, the expected return on the market is 14.0 percent and the risk-free rate is expected to be 4.0 percent. Given this information, determine the beta for Security K for the coming year, assuming CAPM is the correct model for required returns. Correlation Matrix K 0.60 1.00 0.90 1.00 0.60 0.80 Market 0.0020480 0.0021600 Market 0.80 0.90 1.00 Ston sharing Hidel lines We

i. What are the assumptions underlying the CAPM? ii. What is meant by the market portfolio?iii. Sketch the capital market line and the efficient frontier when borrowing and lending rates are equal. Label the axes and important points of your sketch. iv. Do the same for the Security Market Line v. Would you expect firms with high operating leverage to have higher betas?Explain!