Use the utility function u = E(₂) - 0.5 A o where A is the risk aversion parameter and A = 3.5. Use the average annual return on the S&P 500 as E (rp). Use the average annual interest rate on the US Government 10-year treasury bond over the past decade as r.¹ Solve for the investor's optimal allocation between the risky and the risk-free asset.

Use the utility function u = E(₂) - 0.5 A o where A is the risk aversion parameter and A = 3.5. Use the average annual return on the S&P 500 as E (rp). Use the average annual interest rate on the US Government 10-year treasury bond over the past decade as r.¹ Solve for the investor's optimal allocation between the risky and the risk-free asset.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.10P

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In a binomial interest rate tree model, assume that the six-month rate process starts on date 0 ((=0) at 5% and then increases or decreases by 100 basis points every six months. On date 0. the prices of a six-month zero (A) and a 1-year zero (B) are 97.5610 and 95.0908 respectively. a) Find the risk-neutral probability of an up move on date 0 for the six-month rate process over the next 6-month. b) Find the price of the 1-year zero (B) in the down state of the binomial tree on date 1 (t-1).
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6. for a large company (she travels by car). She earns 900 euros a week in fixed salary, but if she reaches the set for a week sales target, she receives a bonus of 325 euros that week. The probability of getting the bonus is 0.2. A person is a traveling salesman of goods Her utility function over money is given by U=√W, where W is the wealth in SEK per week. 6a 6b What is her expected weekly bonus? Her boss offers her another job within the same company. If so, she would work in an office with a certain personnel responsibility and receive a fixed salary per week (no bonuses). What salary per week must her boss at least offer her in order for her to accept new work? Justify your answer based on expected utility theory.
10. Which one of the following measures may be used to measure the risk of an investment on its own? a) Expected return of the investment. b) Expected utility of the investment for an investor. c) Standard deviation of the possible outcomes of the investment. d) The Bernoullian utility function's value of a good investment outcome.
Assume you can invest in 2 projects whose payoff depend on the state of the economy. The profits from each project for each state of the economy are presented below. What are the expected payoffs of each project if there is a 30% chance of a recession and a 70% of no recession? Profit under recession Profit under normal conditions Project 1 |100,000 150,000 Project 2 50,000 240,000 Project 1: $130,000 and Project 2: $180,000 O Project 1: $135,000 and Project 2: $183,000 O Project 1: $135,000 and Project 2: $180,000 O Project 1: $130,000 and Project 2: $183,000
Studies have concluded that a college degree is a very good investment. Suppose that a college graduate earns about 79% more money per hour than a high-school graduate. If the lifetime earnings of a high-school graduate average $1,070,000, what is the expected value of eamings of a college graduate? The expected value of earnings of a college graduate is $. (Round to the nearest whole dollar.)
"A financial investor has $31,000 to invest. The choices have been narrowed down to the following two options.-OPTION 1:Invest in a foreign bond that will mature in one year. This will entail an immediate brokerage fee of $100. For simplicity, assume that the bond will provide interest of $2,470, $2,130, or $1,527 over the one-year period and that the probabilities of these occurrences are assessed to be 0.29, 0.43, and 0.28, respectively.-OPTION 2:Invest in a $31,000 certificate with a savings-and-loan association. Assume that this certificate has an effective annual rate of 5.6%.Which form of the investment should the investor choose in order to maximize her expected financial gains? Enter the expected net gain (total return - initial investment - fee) of the preferred option."
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.
5. Find the expected value assuming the risk factor is 30 % and the interest rate is 12% , if you will receive $20,000 one year from today.
Pls solve it quickly.
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