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Identify the factors
underlying the portfolio choice theory of
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- Consider an insurance contract with the premium r=$200 and payout q=$800. What is John’s expected income without this insurance contract? What is John’s expected income with this insurance contract?How can diversification in investment portfolios reduce systemic and non-systemic risk in the context of modern portfolio theory ?Provide 4 economic reasons as to why portfolio rankings should be inconsistent or consistent with each other.
- Consider the Diamond-Dybvig model of bank runs utility function is given by U(c) = √c and that the parameter values are R = 4, discount factor ß = 1/3, and π = 2/5 A) How much do type-1 agents and type-2 agents consume in periods 1 and 2 under autarky, i.e., if there are no banks, insurance companies, or markets? What is the ex-ante expected utility that they derive in this scenario? How much do type-1 agents and type-2 agents consume in periods 1 and 2 in the "good" banking equilibrium? What is the ex-ante expected utility that they derive in this scenario? How many agents are able to execute their claims in period 1 (i.e., withdraw the maximum amount they have been promised) in the bank run equilibrium?P b. Show (by changing demand curves accordingly) in the following graphs what happens in the financial markets when the default risk is high. D1 S1 Treasury bond P D1 S1 Corporate bondExcercise: Consider the Diamond-Dybvig model of bank runs utility function is given by U(c) = √c and that the parameter values are R = 4, discount factor ß = 1/3, and π = 2/5 A) How much do type-1 agents and type-2 agents consume in periods 1 and 2 under autarky, i.e., if there are no banks, insurance companies, or markets? What is the ex-ante expected utility that they derive in this scenario? B) How much do type-1 agents and type-2 agents consume in periods 1 and 2 in the "good" banking equilibrium? What is the ex-ante expected utility that they derive in this scenario? C) How many agents are able to execute their claims in period 1 (i.e., withdraw the maximum amount they have been promised) in the bank run equilibrium?
- What is covariance, and why is it important in portfolio theory?When you are long an option and you delta hedge, you want A. traders talking a lot about other asset classes and ignore your underlying B. volatility to increase and the underlying to move around a lot C. the cost of carry to narrow D. volatility to decrease and the underlying to just stop movingWhy does the limitation of Portfolio analysis is Naively following the prescriptions of a portfolio model may actually reduce corporateprofits if they are used inappropriately?