Principles of Macroeconomics, Loose-Leaf Version
8th Edition
ISBN: 9781337096881
Author: Mankiw, N. Gregory
Publisher: South-Western College Pub
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Chapter 14, Problem 5CQQ
To determine
Based ondiversification and its benefit.
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A risk-averse investor will:
a. Always accept a greater risk with a greater expected return
b. Only invest in assets providing certain returns
c. Sometimes accept a lower expected return if it means less ri
d. Never accept lower risk if it means accepting a lower expected return
What term do economists use to describe the tendency for people to prefer certain outcomes over risky situations?
a. The precautionary principle
b. Risk differentiationc. Risk uncertainty
d. Risk aversion
e. Risk management
3. The risk free rate is 3%. The optimal risky portfolio has an expected return of 9% and standard deviation of 20%. Answer the following questions.
(a) Assume the utility function of an investor is U = E(r) − 0.5Aσ2. What is condition of A to make the investors prefer the optimal risky portfolio than the risk free asset?
(b) Assume the utility function of an investor is U = E(r) − 2.5σ2. What is the expected return and standard deviation of the investor’s optimal complete portfolio?
Chapter 14 Solutions
Principles of Macroeconomics, Loose-Leaf Version
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- How can risks be measured for a company like Publix supermarket, and what rules can help managers make decisions under uncertainty?arrow_forwardHelparrow_forwardWhich of the following describes the attribute of a risk neutral investor? Select one: a. An investor that makes decisions based on the advice of financial planners. b. An investor that makes decisions based on the expected return of assets. C. An investor that makes decisions based on the credit rating of assets.arrow_forward
- Optimal Portfolio: Mean-Variance OptimizationIf you are a portfolio manager who predicted that the tension in Ukraine might spiral into a global economic problem back in December 2021. She decided to construct a portfolio that, she think, would outperform in a war scenario, or in a heightened war risk scenario. Please use the following ETFs:IAU: iShares Gold Trust ETFVDE: Vanguard Energy ETFXLB: Materials Sector SPDR ETFDBC: Invesco DB Commodity Index Tracking FundCQQQ: China Technology Index ETFConstraints:i. Use all ETF products. (Weight of each ETF>= 2% )ii. No ETF is to have more than 40% weight in portfolioObjective: Maximize Expected Return, Minimize volatility, ie. MaximizeSharpe RatioStep 1: Collect historical price/return data for the ETFs over Jan-2018 to Dec-21 period.Step 2: Assume the Average Historical Return is the Expected Return for each asset (strong assumption) and Historical Volatility is the Expected Volatility (strong assumption).Step 3: Present the var-cov…arrow_forwardIn the mean-standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called _________. A. the capital allocation lineB. the indifference curveC. the investor's utility lineD. the security market linearrow_forwardThe main advantage of mutual funds is that theyprovidea. a return insured by the government.b. an easy way to hold a diversified portfolio.c. an asset that is widely used as the medium ofexchange.d. a way to avoid fluctuations in stock and bondprices.arrow_forward
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- The risk that covers events like unexpected changes in the economy refers to: Select one: A. All of the above B. Systematic risk. C. Total risk. D. Unsystematic riskarrow_forwardWhat decision will a company make when facing uncertainty. Compute the expected costs and benefits of the decision. Offer an advice on how the company will proceed in making the decision. Compute the profit consequences of the advice.arrow_forwardWhat is the difference if any between an individual gambling at a casino and gambling by buying a stock? What is the difference for society? For an individual, gambling at a casino or by buying a stock A. is the same because they have the same expected values. B. is the same insofar that both involve uncertain outcomes C. different because the expected value of gambling in a casino is higher. 2. For society, gambling at a casino or by buying a stock A. is the same because neither redistribute income. B. is different because buying a stock more directly provides capital for companies to make productive investments. C. is the same because both have no effect on the budget deficit.arrow_forward
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