Explanation
The bond equivalent yield for a treasury bill can be calculated as [(Future value - Present value)/Present value x 365/days to maturity]. In this case this works out to ($100-$98)/$98 * 365/90 = 8.28%
[Why do we use 365 days and not 360? And is there a different way to calculate treasury bill yields?
The answer to this question is that there are alternate ways to calculate these yields. For the exam, I would suggest that you calculate according to one method, see if you get an answer that matches, and pick that. I found the below on the NY Fed's website - a very clear example: (http://newyorkfed.org/aboutthefed/fedpoint/fed28.html) The Discount Yield Method The following formula is used to determine the discount yield for T-bills that have three- or six-month maturities:
Discount yield = [(FV - PP)/FV] * [360/M]
FV = face value
PP = purchase price
M = maturity of bill. For a three-month T-bill (13 weeks) use 91, and for a six-month T-bill (26 weeks) use
182
360 = the number of days used by banks to determine short-term interest rates (the investment yield method is based on a calendar year: 365 days, or 366 in leap years).
Example
What is the discount yield for a 182-day T-bill, auctioned at an average price of $9,659.30 per $10,000 face value?
Discount yield = [(FV - PP)/FV] * [360/M]
FV = $10,000 PP = $9,659.30 M = 182
Discount yield = [(10,000) - (9,659.30)] / (10,000) * [360/182]
Discount yield = [340.7 / 10,000] * [1.978022]
Discount yield = .0673912 = 6.74%
For the 13-week bill, the same formula would be used, dividing 360 by a maturity of 91 days rather than 182 days.
The Investment Yield Method
When comparing the return on investment in T-bills to other short-term investment options, the investment yield method can be used. This yield is alternatively called the bond equivalent yield, the coupon equivalent rate, the effective yield and the interest yield.
The following formula is used to calculate the investment yield for T-bills that have three- or six-month maturities:
Investment yield = [(FV - PP)/PP] * [365 or 366/M]
Example
What is the investment yield of a 182-day T-bill, auctioned at an average price of $9,659.30 per $10,000 face value?
Investment yield = [(FV - PP)/PP] * [365/M]
FV = $10,000 PP = $9,659.30 M = 182
Investment yield = [(10,000 - 9,659.30) / (9,659.30)] * [365/182]
Investment yield = [340.70] / 9,659.30] * [2.0054945]
Investment yield = .0707372 = 7.07%
For the 13-week bill, the same formula can be used, dividing 365 (or 366) by a maturity of 91 days.

Explanation
The day count convention used for US treasury bonds is Act/Act. The other choices are incorrect.

Explanation
The transformation line represents the various possible combinations of the 'risky bundle' and the risk free asset. Investors can choose different combinations of the risky and risk-free asset depending upon their risk appetite. The transformation line meets the y-axis (portfolio returns) at the point equal to the risk free rate.
Choice 'a' is the correct answer and the rest are incorrect.
The highest possible transformation line, ie the transformation line with the maximum slope, is the transformation line joining the risk free rate on the y-axis and the portfolio with the maximum Sharpe ratio on the efficient frontier. This line is called the 'capital markets line'. Investors can pick any point on this line according to their risk appetite, and doing so would maximize the return they can obtain for their desired level of risk. The capital markets line is tangential to the efficient frontier. The Sharpe ratio stays constant throughout the CML.
Remember that the transformation line and the capital markets lines are different from each other - there is only one CML for an efficient frontier, whereas there can be multiple transformation lines.

Explanation
The Sharpe ratio is the ratio of excess returns to risk. Excess returns are measured as the returns over the risk-free rate, and risk is measured in terms of volatility, ie standard deviation. Two portfolios with identical Sharpe ratios will certainly have the same ratio of risk and return, though the absolute levels of the return and the risk may vary. Therefore Choice 'c' is the correct answer.

Explanation
A cash or nothing call is one that pays a fixed amount if the underlying exceeds a certain threshold, or nothing.
An asset or nothing call is the same as the cash or nothing call except that instead of paying a fixed amount, it
'pays' the asset. Therefore the payoff profile of a long asset or nothing call has the same payoff as a long cash or nothing call and a long vanilla call.
This is best considered by building payoff diagrams which will show how the two positions are economically equivalent. Choice 'd' is the correct answer, and the rest are not.