A SURVEY OF MATH 18 WK MML CODE
10th Edition
ISBN: 9780135834954
Author: Angel
Publisher: PEARSON
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Chapter 7.1, Problem 68E
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3. A market consists of two risky assets with rates of return R₁ and R2 and no risk-free
asset. From market data the following have been estimated: ER₁ = 0.25, ER2 = 0.05,
Var R₁ = 0.01, Var R2 = 0.04 and the correlation between R1 and R2 is p = -0.75.
(i) Given that an investor is targeting a total expected return of μ = 0.2. What
portfolio weights should they choose to meet this goal with minimum portfolio
variance? Correct all your calculations up to 4 decimal points.
(ii) Determine the global minimum-variance portfolio and the expected return and
variance of return of this portfolio (4 d.p.).
(iii) Sketch the minimum-variance frontier in the μ-σ² plane and indicate the efficient
frontier.
(iv) Without further calculation, explain how the minimum variance of the investor's
portfolio return will change if the two risky assets were independent.
2. A landlord is about to write a rental contract for a tenant which lasts T months. The
landlord first decides the length T > 0 (need not be an integer) of the contract, the
tenant then signs it and pays an initial handling fee of £100 before moving in. The
landlord collects the total amount of rent erT at the end of the contract at a continuously
compounded rate r> 0, but the contract stipulates that the tenant may leave before T,
in which case the landlord only collects the total rent up until the tenant's departure
time 7. Assume that 7 is exponentially distributed with rate > 0, λ‡r.
(i) Calculate the expected total payment EW the landlord will receive in terms of T.
(ii) Assume that the landlord has logarithmic utility U(w) = log(w - 100) and decides
that the rental rate r should depend on the contract length T by
r(T)
=
λ
√T
1
For each given λ, what T (as a function of X) should the landlord choose so as to
maximise their expected utility? Justify your answer.
Hint. It might be…
Please solving problem2
Problem1
We consider a two-period binomial model with the following properties: each period lastsone (1) year and the current stock price is S0 = 4. On each period, the stock price doubleswhen it moves up and is reduced by half when it moves down. The annual interest rateon the money market is 25%. (This model is the same as in Prob. 1 of HW#2).We consider four options on this market: A European call option with maturity T = 2 years and strike price K = 5; A European put option with maturity T = 2 years and strike price K = 5; An American call option with maturity T = 2 years and strike price K = 5; An American put option with maturity T = 2 years and strike price K = 5.(a) Find the price at time 0 of both European options.(b) Find the price at time 0 of both American options. Compare your results with (a)and comment.(c) For each of the American options, describe the optimal exercising strategy.
Chapter 7 Solutions
A SURVEY OF MATH 18 WK MML CODE
Ch. 7.1 - In Exercises 110, fill in the blanks with an...Ch. 7.1 - Prob. 2ECh. 7.1 - In Exercises 110, fill in the blanks with an...Ch. 7.1 - Prob. 4ECh. 7.1 - In Exercises 110, fill in the blanks with an...Ch. 7.1 - Prob. 6ECh. 7.1 - Prob. 7ECh. 7.1 - Prob. 8ECh. 7.1 - Prob. 9ECh. 7.1 - Prob. 10E
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One...Ch. 7.2 - In Exercises 6972, select the best answer. 70. One...Ch. 7.2 - In Exercises 6972, select the best answer. 71. One...Ch. 7.2 - Prob. 72ECh. 7.2 - Prob. 75ECh. 7.2 - Prob. 76ECh. 7.2 - Prob. 77ECh. 7.2 - Prob. 78ECh. 7.2 - Prob. 79ECh. 7.2 - Prob. 80ECh. 7.2 - In Exercises 7386, when appropriate, use the key...Ch. 7.2 - Prob. 82ECh. 7.2 - Prob. 83ECh. 7.2 - Prob. 84ECh. 7.2 - Prob. 85ECh. 7.2 - Prob. 86ECh. 7.2 - Prob. 87ECh. 7.2 - Prob. 88ECh. 7.2 - Prob. 89ECh. 7.2 - Prob. 90ECh. 7.2 - Prob. 91ECh. 7.2 - Prob. 92ECh. 7.2 - In Exercises 9396, fill in the blank. 93. 501 cm3...Ch. 7.2 - In Exercises 9396, fill in the blank. 94. 435 cm3...Ch. 7.2 - In Exercises 9396, fill in the blank. 95. 263 k =...Ch. 7.2 - In Exercises 9396, fill in the blank. 96. 4.2 =...Ch. 7.2 - Glacier In Exercises 97 and 98, assume that a part...Ch. 7.2 - Glacier In Exercises 97 and 98, assume that a part...Ch. 7.2 - Challenge Problems/Group Activities In Exercises...Ch. 7.2 - Challenge Problems/Group Activities In Exercises...Ch. 7.2 - Prob. 101ECh. 7.2 - Prob. 102ECh. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 18, fill in the blanks with an...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 918, indicate the metric unit of...Ch. 7.3 - In Exercises 1924, select the best answer. 19. 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Use...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - In Exercises 3750, convert each temperature as...Ch. 7.3 - Prob. 46ECh. 7.3 - Prob. 47ECh. 7.3 - Prob. 48ECh. 7.3 - Prob. 49ECh. 7.3 - Prob. 50ECh. 7.3 - Prob. 51ECh. 7.3 - Prob. 52ECh. 7.3 - Prob. 53ECh. 7.3 - Prob. 54ECh. 7.3 - Prob. 55ECh. 7.3 - Prob. 56ECh. 7.3 - Prob. 57ECh. 7.3 - Prob. 58ECh. 7.3 - Curry As shown in the photo, curry being sold at...Ch. 7.3 - Prob. 60ECh. 7.3 - Prob. 61ECh. 7.3 - Prob. 62ECh. 7.3 - Prob. 63ECh. 7.3 - Prob. 64ECh. 7.3 - Prob. 65ECh. 7.3 - Prob. 66ECh. 7.3 - Prob. 67ECh. 7.3 - Prob. 68ECh. 7.3 - Prob. 69ECh. 7.3 - Fish Tank A rectangular fish tank is 1 yd long by...Ch. 7.3 - Prob. 71ECh. 7.3 - Prob. 72ECh. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with aft...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 110, fill in the blanks with an...Ch. 7.4 - In Exercises 1126, convert the quantity to the...Ch. 7.4 - In Exercises 1126, convert the quantity to the...Ch. 7.4 - In Exercises 1126, convert the quantity to the...Ch. 7.4 - In Exercises 1126, convert the quantity to the...Ch. 7.4 - In Exercises 1126, convert the quantity to the...Ch. 7.4 - 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- 1. Consider the following preference ballots: Number of voters Rankings 6 5 4 2 1st choice A DCB DC 2nd choice B B D 3rd choice DCBD 4th choice CA AAA For each of the four voting systems we have studied, determine who would win the election in each case. (Remember: For plurality with runoff, all but the top two vote-getters are simultaneously eliminated at the end of round 1.)arrow_forwardPractice k Help ises A 96 Anewer The probability that you get a sum of at least 10 is Determine the number of ways that the specified event can occur when two number cubes are rolled. 1. Getting a sum of 9 or 10 3. Getting a sum less than 5 2. Getting a sum of 6 or 7 4. Getting a sum that is odd Tell whether you would use the addition principle or the multiplication principle to determine the total number of possible outcomes for the situation described. 5. Rolling three number cubes 6. Getting a sum of 10 or 12 after rolling three number cubes A set of playing cards contains four groups of cards designated by color (black, red, yellow, and green) with cards numbered from 1 to 14 in each group. Determine the number of ways that the specified event can occur when a card is drawn from the set. 7. Drawing a 13 or 14 9. Drawing a number less than 4 8. Drawing a yellow or green card 10. Drawing a black, red, or green car The spinner is divided into equal parts. Find the specified…arrow_forwardProblem 1.We consider a two-period binomial model with the following properties: each period lastsone (1) year and the current stock price is S0 = 4. On each period, the stock price doubleswhen it moves up and is reduced by half when it moves down. The annual interest rateon the money market is 25%. We consider four options on this market: A European call option with maturity T = 2 years and strike price K = 5; A European put option with maturity T = 2 years and strike price K = 5; An American call option with maturity T = 2 years and strike price K = 5; An American put option with maturity T = 2 years and strike price K = 5.(a) Find the price at time 0 of both European options.(b) Find the price at time 0 of both American options. Compare your results with (a)and comment.(c) For each of the American options, describe the optimal exercising strategy.(d) We assume that you sell the American put to a market participant A for the pricefound in (b). Explain how you act on the market…arrow_forward
- What is the standard scores associated to the left of z is 0.1446arrow_forward2. [-/1 Points] DETAILS MY NOTES SESSCALCET2 6.5.015. Use the Trapezoidal Rule, the Midpoint Rule, and Simpson's Rule to approximate the given integral with the specified value of n. (Round your answers to six decimal places.) ASK YOUR TEACHER 3 1 3 + dy, n = 6 (a) the Trapezoidal Rule (b) the Midpoint Rule (c) Simpson's Rule Need Help? Read It Watch Itarrow_forwardThis question builds on an earlier problem. The randomized numbers may have changed, but have your work for the previous problem available to help with this one. A 4-centimeter rod is attached at one end to a point A rotating counterclockwise on a wheel of radius 2 cm. The other end B is free to move back and forth along a horizontal bar that goes through the center of the wheel. At time t=0 the rod is situated as in the diagram at the left below. The wheel rotates counterclockwise at 1.5 rev/sec. At some point, the rod will be tangent to the circle as shown in the third picture. B A B at some instant, the piston will be tangent to the circle (a) Express the x and y coordinates of point A as functions of t: x= 2 cos(3πt) and y= 2 sin(3πt) (b) Write a formula for the slope of the tangent line to the circle at the point A at time t seconds: -cot (3πt) (c) Express the x-coordinate of the right end of the rod at point B as a function of t: 2 cos(3πt) +41/1 (d) Express the slope of the rod…arrow_forward
- Consider the proof below: Proposition: If m is an even integer, then 5m +4 is an even integer. Proof: We see that |5m+4=10n+4 = 2(5n+2). Therefore, 5m+4 is an even integer. **Note: you may assume the proof is valid, just poorly written. Based upon the Section 1.3 screencast and the reading assignment, select all writing guidelines that are missing in the proof. Proof begins by stating assumptions ✓ Proof has an invitational tone/uses collective pronouns Proof is written in complete sentences Each step is justified ☐ Proof has a clear conclusionarrow_forwardNote: The purpose of this problem below is to use computational techniques (Excelspreadsheet, Matlab, R, Python, etc.) and code the dynamic programming ideas seen inclass. Please provide the numerical answer to the questions as well as a sample of yourwork (spreadsheet, code file, etc.).We consider an N-period binomial model with the following properties: N = 60, thecurrent stock price is S0 = 1000; on each period, the stock price increases by 0.5% whenit moves up and decreases by 0.3% when it moves down. The annual interest rate on themoney market is 5%. (Notice that this model is a CRR model, which means that thebinomial tree is recombining.)(a) Find the price at time t0 = 0 of a (European) call option with strike price K = 1040and maturity T = 1 year.(b) Find the price at time t0 = 0 of a (European) put option with strike price K = 1040and maturity T = 1 year.(c) We consider now, that you are at time t5 (i.e. after 5 periods, which represents 1month later). Assume that the stock…arrow_forward4. [-/1 Points] DETAILS MY NOTES SESSCALCET2 6.5.024. Find the approximations Tη, Mn, and S, to the integral computer algebra system.) ASK YOUR TEACHER PRACTICE ANOTHER 4 39 √ dx for n = 6 and 12. Then compute the corresponding errors ET, EM, and Es. (Round your answers to six decimal places. You may wish to use the sum command on a n Tn Mn Sp 6 12 n ET EM Es 6 12 What observations can you make? In particular, what happens to the errors when n is doubled? As n is doubled, ET and EM are decreased by a factor of about Need Help? Read It ' and Es is decreased by a factor of aboutarrow_forward
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