Does diversification eliminate consumption risk

Reference no: EM13179893

Consider a world of two countries; Highland (H) and Lowland (L). Each country has an average output of 9 and desires to smooth consumption. All income takes the form of capital income and is fully consumed each period. There are two states of the world: Pestilence (P) and Flood (F). Each happens with 50% probability. Pestilence affects Highland and lowers the output there to 8, leaving Lowland unaffected with an output of 10. Flood affects Lowland and lowers the output there to 8, leaving Highland unaffected with an output of 10. Devise a table with two rows corresponding to each state (rows marked P and F). In three columns, show income to three portfolios: the portfolio of 100% claims to H output, the portfolio of 100% claims to L output, and the portfolio of 50% claims to H output + 50% claims to L output. Does diversification eliminate consumption risk?

Reference no: EM13179893

Questions Cloud

State and write the structures of all the alkenes : Write the structures of all the alkenes that can be formed by dehydrohalogenation of each of the following alkyl halides.

Compute the wavelength in nanometers : Calculate the wavelength, in nanometers, of the spectral line produced when an electron in a hydrogen atom undergoes the transition from the energy level

Best illustrates what sharon has observed in her customers : Sharon noticed that many of her high-end, outdoor spa customers drive Volvos, a luxury car known for its safety record and high performance. Which of the following terms best illustrates what Sharon has observed in her customers?

Explain why foreign output decreases : Assume the government allows the exchange rate to áoat and makes no policy response. To get full credit each of your answers must be supported by the appropriate IS-LM-FX graphs. 1. Foreign output decreases. 2. Investors expect a depreciation of th..

Does diversification eliminate consumption risk : Consider a world of two countries; Highland (H) and Lowland (L). Each country has an average output of 9 and desires to smooth consumption. All income takes the form of capital income and is fully consumed each period. There are two states of the ..

Describe comprehensive drug abuse prevention and control act : Describe the Comprehensive Drug Abuse Prevention and Control Act of 1970. Include the criteria for listing a drug as a Schedule 1 - Schedule V controlled substance and give some examples of drugs that are in the Schedule 1 - Schedule V?

How the poor country will converge with the rich country : Assuming that poor and rich countries have the same production function, illustrate how the poor country will converge with the rich country. Describe how this mechanism works. 2. In the data, countries with low living standards have capital-to-wo..

Describe cerebrum-executive suite-visceral command center : Which of the following best describes the cerebrum? motor command center, executive suite, visceral command center, or decussation center?

Compute the flow rate of solution needed to concetrate : calculate the flow rate of solution B needed to concetrate 300 ibm/hr of 55% H2SO4 (solution A) and the resulting flow rate of solution C

User Account

All Pages