Reference no: EM13685966
Consider an economy where CAPM holds, the risk free rate is Rf = 2% and the return of the market portfolio has expectation ERm = 10% and standard deviation 40%.
(a) Draw the capital market line. What is the optimal portfolio of a mean-variance in-vestor with risk aversion A = 2? What is the mean and standard deviation of this portfolio? Show this portfolio in the .gure. What is the value of this investor’s mean-variance utility function if he invests in this optimal portfolio (i.e., what is ERp-(A/2) Var (Rp))?
(b) What is the optimal portfolio of an investor with risk aversion A = 4? What is its mean and standard deviation? Show this portfolio in argue too. What is the value of this investor’s mean-variance utility function when investing optimally?
(c) Now presume that due to a reduction in uncertainty, the standard deviation of the market return falls to 20 percent, while other parameters are unchanged. Draw the new capital market line. What are the new optimal portfolios of the two investors? What are these portfolios means and standard deviations? Show them in the figure. Which investor's portfolio share of risky assets changes by more relative to earlier? Why?
(d) What are the values of the two investors’ utility functions now, given their new optimal investments? Which investor’s utility increases by more relative to before? Why?
Comment on this statement: .Reductions in risk is most beneficial to conservative investors who are highly sensitive to actuations in their wealth.
|
Cost of capturing a cockatoo and transporting
: Presume that the cost of capturing a cockatoo and transporting him to the United States is about $40 per bird. Cockatoos are smuggled and drugged in suitcases to the United States. Half of the smuggled cockatoos die in transit.
|
|
Two small open economies-fixed and flex
: Two small open economies, Fixed and Flex, can be described by the Mundell%u2013Fleming model. The countries are otherwise identical except that Fixed maintains a fixed exchange rate, while Flex maintains a flexible exchange-rate regime.
|
|
Risky business one needs to perform a thorough research
: In Risky business one needs to perform a thorough research. In fact more than the routine research. Especially, if one has quite a bit at stake! Any comments or interesting story to share? Do you have any ideas about a News venture that you like to s..
|
|
Income may be received as property or as services
: Income may be received as property or as services.
|
|
What is the optimal portfolio of a mean-variance in-vestor
: Draw the capital market line. What is the optimal portfolio of a mean-variance in-vestor with risk aversion A = 2? What is the mean and standard deviation of this portfolio? Show this portfolio in the .gure. What is the value of this investor’s mean-..
|
|
Examples of economic activities-decrease in taxes
: Explain how each of these activities affects government, households, and businesses. Explain the flow of resources from one entity to another for each activity. Relate at least one current event to the activities.
|
|
Find the fiscal policy approach
: Find the fiscal policy approach utilized by the U.S., Germany, China, and the U.K. from 2008 until present. What approach did each of these countries take, and what was the change in GDP for each one of these economies from 2008 until present? Which ..
|
|
What types of audits they apply
: What types of audits they apply to.
|
|
What is the absolute size of its public debt
: Presume that a country has no public debt in year 1 however experiences a budget deficit of $20 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5. Wha..
|