Question 3a(350 words): Comment on the bond’s risk and discuss if it can be seen as a risk free security. Consider the different risks that Australian bond investors are exposed to and which are or aren’t significant. Use academic references to support your answer.
Question 3b (200words): For the purpose of an investor trying to make a portfolio allocation decision using Markowitz mean-variance optimization, a risk free rate is needed. What risk-free rate would you recommend that the investor use? Outline the rationale for your decision. Use academic references to support your answer.