5. Find the expected value assuming the risk factor is 30% and the interest rate is 15%, if you will receive $20,000 one year from today. 6. Find the expected value assuming the risk factor is 30% and the interest rate is 15%, if you will receive $20,000 two years from today.
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- What are some reasons why the investment strategy of a 30-year-old might differ flow the investment strategy of a 65-year-old?6. Risk-averse people will choose different asset portfolios than people who are not risk averse. Over a long period of time, we would expect thatA.every risk-averse person will earn a higher rate of return than every non-risk averse person.B.every risk-averse person will earn a lower rate of return than every non-risk averse person.C.the average risk-averse person will earn a higher rate of return than the average non-risk averse person.D.the average risk-averse person will earn a lower rate of return than the average non-risk averse person. 7.The real exchange rate equals the relative A.price of domestic and foreign currency.B.price of domestic and foreign goods.C.rate of domestic and foreign interest. D.None of the above is correct. 8.According to the theory of liquidity preference, an increase in the price level causes theA.interest rate and investment to rise.B.interest rate and investment to fall.C.interest rate to rise and investment to fall.D.interest rate to fall and…Sam, after taking a $200 loan from the bank to finance an investment that pays $1000 50% of the time and $0 50% of the time at a 100% interest, discovers another riskier investment that pays out $5,000 but only 10% of the time, while the other 90% of the time it pays zero. Would the he want to switch to the riskier investment? Question 4 options: Yes because his return has increased No because his liability to the bank has increased No because his return has decreased None of the above
- 3) A risk-loving individual has $1000 to invest. The individual maximizes his/her expected utility and has a monotonic utility function. Show that he/she will never choose a diversified portfolio - that is, show that he/she will either keep the entire $1000 in a safe, or invest the entire $1000 in a risky assesst, for which each $1 invested yields $] with probability p, and SB with probability (1-p), where $B<$1<$J.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.Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free government bonds and a risky group of diversified stocks. The following table shows the risk and return associated with different combinations of stocks and bonds.CombinationFraction of Portfolio in Diversified StocksAverage Annual ReturnStandard Deviation of Portfolio Return (Risk)(Percent)(Percent)(Percent)A 0 1.50 0B 25 3.00 5C 50 4.50 10D 75 6.00 15E 100 7.50 20There is a relationship between the risk of Caroline's portfolio and its average annual return.Suppose Caroline currently allocates 75% of her portfolio to a diversified group of stocks and 25% of her portfolio to risk-free bonds; that is, she chooses combination D. She wants to reduce the level of risk associated with her portfolio from a standard deviation of 15 to a standard deviation of 5. In order to do so, she must do which of the following? Check all that apply. Sell some of her stocks and use the proceeds to purchase…
- 3. You are in the market for a used car and decide to visit a used car dealership. Youknow that the Blue Book value of the car you are looking at is between $14,000 and$18,000.a. If you believe the dealer knows as much about the car as you do, how much areyou willing to pay? Why? Assume that you care only about the expected value ofthe car you will buy and that the car values are symmetrically distributed.b. Now you believe the dealer knows more about the car than you do. How much areyou willing to pay? Why? How can this asymmetric information problem beresolved in a competitive market?Suppose you have a house worth $200,000 (wealth). Your utility of wealth is given by U(w) = ln(w). There is a small chance that a fire will damage your house causing a loss of $75,000. You estimate there is a 2% chance of fire. a) What is your expected wealth? b) What is your expected utility from owning the house? c) Suppose you can add a fire detection/prevention system to your house. This would reduce the chance of a bad event to 0 but it would cost you $C to install. What is the most you are willing to pay for the security system? (Here is an identity you will find usefulWhat 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.
- Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. (1) Does A or B offer Jamal a higher expected utility? Explain your reasoning with calculations. (2) Should Jamal pick A or B? Why? I would like help with the unanswered last parts of the questions.B. Richard's nickname is "No-Risk Rick" because he is an extremely risk-averse individual. His utility function is given by U(W) = √W. where W represents his current wealth in dollars. He currently has $100 worth of property, but there is a 50% chance that all of it will be stolen. What is Richard's expect wealth and expected utility of wealth? An insurance company offers to reimburse Richard for his loss if the money is stolen. What is the most that Richard would pay for such a policy? Explain. Please solve this with in 1 hour
