Consider now the two-period model in general equilibrium, but with asymmetric information on the firm side. Derive the equilibrium condition and explain the effects of an increase in the risk premium for the demand of investment.
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Consider now the two-period model in general equilibrium, but with asymmetric information on the firm side. Derive the equilibrium condition and explain the effects of an increase in the risk premium for the
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- Suppose one uses the single-index model to estimate characteristics of securities.Which of the following statements is correct? (a)The covariances between securities are the same as in the data. (b)The variance of a portfolio is the same as in the data. (c)The expected return and the variance of a security are the same as in the data. (d)The expected return,variance and covariances of a security are the same as in the daIn the shareholder wealth maximization model, the value of a firm's stock is equal to the present value of all expected future ____ discounted at the stockholders' required rate of return.Consider the model of investment under asymmetric information D=(1 + r)(1- W). Suppose that initially the entrepreneur is undertaking the project, and that (1 + r)(1- W) is strictly less than RMAX. Describe how each of the following affects D:(a) A small increase in W .(b) A small increase in r.(c) A small increase in c.(d) Instead of being distributed uniformly on [0, 2γ], the output of the project is distributed uniformly on [γ - b, γ + b], and there is a small increase in b.(e) Instead of being distributed uniformly on [0, 2γ], the output of the project isdistributed uniformly on [b, 2γ + b], and there is a small increase in b.
- From the following equation for expected returns, explain what may cause stock prices to decrease in economic recessions: E(r) – risk-free rate = A*Var(r) A is the risk aversion for the average investor, and Var(r) is the variance of the market portfolio. Assume that investor risk aversion is constant.Why does the limitation of Portfolio analysis is Naively following the prescriptions of a portfolio model may actually reduce corporateprofits if they are used inappropriately?Indicate whether the statement is true or false, and justify your answer.Consider two investment streams w and z which pay out some amount, w(t) and z(t), in each period t. (The amount may be negative in some periods.) If the interest rate is exactly equal to the internal rate of return of w(t), the net present value of choosing w over z is zero.
- Determine which of the two investment projects of Problem 5 the manager should choose if the discount rate of the firm is 30 percent. Additional information. Problem 5 states determine which of two investment projects a manager should choose if the discount rate of the firm is 10 percent. The first project promises a profit of $100,000 in each of the next four years, while the second project promises a profit of $75,000 in each of the next six years.Indicate whether the statement is true or false, and justify your answer. 1. The internal rate of return is defined as the interest rate that makes the net present value of an investment stream exactly equal to zero. 2. In part, physicians’ salaries are higher than secretaries’ salaries because it takes more years to train to become a physician than it does to become a secretary. 3. The fact that practicing surgeons who have finished residency earn more than practicing pediatricians implies that the rate of return to choosing surgery exceeds the rate of return to choosing pediatrics for a medical school graduate.Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: • Stock A has and expected return of 22% and a beta of 2. • Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. (a) Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium.
- In a time series regression of the excess return of a mutual fund on a constant and the excess return on a market index, which of the following statements should be true for the fund manager to be considered to have “beaten the market” in a statistical sense? Select one: a. The estimate for Beta (parameter) should be positive and statistically significant b. The estimate for Beta (parameter) should be positive and statistically significant c. The estimate for Beta (parameter) should be positive and statistically significantly greater than the risk-free rate of return d. The estimate for Beta (parameter) should be negative and statistically significant.Asset insurance Consider the following setup. There is a continuum of households who maximize Where y > 0 is a constant level of income not derived from capital, α ∈ (0, 1), τ is a fixed lump sum tax, kt is the capital held at the beginning of t, g ≤ 1 is an “investment insurance” parameter set by the government, and xt is a stochastic household-specific gross rate of return on capital. We assume that xt is governed by a two-state Markov process with stochastic matrix P , which takes on the two values x1 > 1 and x2 t = x2), the government supplements the household’s return by max(0, g − x2). The household-specific randomness is distributed identically and independently across households. Except for paying taxes and possibly receiving insurance payments from the government, households have no interactions with one another; there are no markets. Given the government policy parameters τ,g , the household’s Bellman equationSuppose you want to model a stock index S (a weighted average of a great number of stocks) using a single-period model. The return ∆S = S(1) − S(0) in the period will be a weighted average of the returns of all the stocks comprising the index. What distribution(s) might be appropriate for modeling ∆S? Why?