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- **Practice** In order to alleviate their risks, they are considering a risk-sharing agreement. Carol would buy one CC and David would buy one DD. Six months from now, they would sell their coins, add up the total amount of money, and split it equally between them. Thus, if only one of the coins is successful, they would both still have some positive amount of money at the end. Assume that they can verify whether the other really made the investment. They know whether the investment is successful, since the price of the coin is public information, and they trust that the other will pay them as promised. Which of the following statements is accurate?A. They will not make that risk-sharing agreement.B. Carol is willing to take the risk-sharing agreement, but David is not.C. They may be willing to make that risk-sharing agreement, but it depends on information not given in the question.D. They will surely make the risk-sharing agreement.E. None of the statements above is correct.4) You are a financial professional working in a corporate loan department. A company named Mitch Hedberg Inc. (MH) comes to you for a loan. MH has debt from a previous loan (given by a different firm than yours) of 200. Your company analysts say that MH is likely to earn either 180, 240, or 300 this year - each with a probability of 1/3. MH wants you to lend them 100. MH could use this borrowed 100 to do either project X or project Y. Project X has a guaranteed return of 125 if the 100 is put there. Project Y may return either 0 or 210; each has probability of 1/2 and also costs 100 to do. a) Which project, X or Y, has the larger expected value? b) If you lend MH the 100, what will they do with the money? Why? Show your math. c) Should you lend MH the money or not? Show your math. d) Why did I choose the letters "MH" for this problem? What financial economic concept with initials "MH" is important in this problem?1. Which of the following is INCORRECT? a All of a stock's risk could be unsystematic. b. A negative beta stock has an expected return less than the risk-free rate. c. Anticipated returns on any given stock are always greater than 0. d. Two assets with a correlation of -1 could be combined to create a portfolio with a standard deviation of zero (no risk). 2. Which of the following measures the total risk of a portfolio? a. Beta b. Standard Deviation c. Correlation Coefficient d. Alpha 3. Which of the following stocks have the highest systematic risk? a A stock with high correlation to the market and high returm volatility. b. A stock with low correlation to the market and a high return volatility. c A stock with high correlation to the market and a low return volatility. d. A stock with low correlation to the market and a low return volatility. 4. Which of the following companics have the lowest systematic risk? a A company that sells soups (Campbells), beta=0.60 b. A coffee company…
- Consider two types of used cars and the following information: Description Peaches Lemons Buyer's Value $12,000 $7,000 Seller's Value $10,500 $6,000 Proportions 3. 5. (a) If a buyer can not distinguish the quality of cars offered for sale, and risk neutrality is assumed, which cars will be offered for sale, and at what price? (b) Discuss the significance of the example above to financial intermediaries.Suppose n firms decide whether to collude or not. Collusion comes at a cost: if the anti-trust regulator catches a firm colluding, it is forced to shut down operations. The probability that the regulator catches you depends on the number of firms in the market, and is equal to 1/n. That is, for a duopoly, the probability of being caught colluding is 50%. What is the minimum discount factor that would result in collusion in a market made of n=2 firms? Answer: 0.75 0.8 0.5 0.97. Jane and Joe are a wealthy couple. In part, this wealth is attributable to Jane’s highly successful limousine business. Although Joe has been involved somewhat in the limousine business, he has a variety of other ventures and assets. Jane decides it should be clearly established that she had legal control over the limousine business and how it is run. As a result, the two enter into a contract pursuant to which Jane foregoes all claims to all business ventures in exchange for Joe agreeing to do the same with respect to the limousine business. At the time, the limousine business has an FMV of $2 million and a basis of $500,000. Joe has the equivalent aggregate FMV and basis in his businesses. What are the tax consequences to Jane and Joe respectively?
- 3) Unlike most money market securities, commercial paper A) in general, has a time to maturity that is longer than a year. B) is not generally traded in a secondary market. C) is not popular with most money market investors because of the high default risk. D) all of the above.Economics Fenner Smith from Workouts 13.2 is an investor who has preferences for risk o and returnu given by the utility function u = min (µ, 4 –0). He plans to invest $40,000. The market rate of return is 8 percent and the risk-free rate of return is 2 percent. The risk on the market portfolio is 2 percent. a. How much of his $40,000 will a utility maximizing investor hold in the market portfolio? Show this as Bundle A in your diagram. b. The market return rises to 16 percent.How much of his $40,000 will he hold in the market portfolio. Show this as Bundle C in your diagram. c. Calculate the Hicksian ČV for this change. Show this in your diagram as Bundle B.1. Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A) $531.40 later today, since $1 today is worth more than $1 in one year. B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. C) Neither - both investments have a negative NPV. D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.
- A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p-s and the buyer's payoffis b-p. Suppose simultaneously the buyer makes an offer p1 and the seller makes an offer p2. A transaction occurs if p1>=p2, and the transaction price is 1/2 (p1 + p2). Is the following strategy profile a Bayesian Nash equilibrium: the buyer chooses p1 = 1/2 if b>=1/2 and he chooses p1=0 if b<1/2; the seller chooses p2=1/2 if s<1/2 and she chooses p2=1 if s>1/2. Why or why not? Can there be a Bayesian Nash Equilibrium in which the transaction price is .9 whenever there is a transaction? Why or why not?2. Consider an individual with a current wealth of $100,000 who faces the prospect of a 25% chance of losing $20,000 through theft of her car during the next year. If the person’s utility function is U(X) = ln(X), where X is wealth: a. calculate expected utility without insurance, b. calculate the actuarially fair premium for full insurance, c. calculate expected utility with full insurance at the actuarially fair premium d. calculate the maximum amount the individual would pay for full insurance.Consider a financial market with two assets: peaches and lemons. The fraction of lemons in the economy is λ = 0.4. Buyers value peaches at up = $20 and lemons at v= $10. Sellers value peaches at vs = $16 and lemons at vi = $8. Sellers have all the bargaining power when setting prices at which assets trade. a) Assume both buyer and sellers can perfectly observe the quality of assets in the market. At what price will lemons and peaches trade? b) Now assume that the quality of assets is unobservable, but that buyers and sellers have symmetric information. That is, neither sellers or buyers can tell whether a particular asset is a lemon or a peach. What is the (pooling) price P* at which assets trade? c) Now assume that only sellers can observe the quality of assets, so that there is asym- metric information between buyers and sellers. Explain (intuitively, without equations) why the quality of assets traded in equilibrium will now depend on the price. d) Calculate the share of lemons that…