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 demand of investment.
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- In a binomial interest rate tree model, assume that the six-month rate process starts on date 0 ((=0) at 5% and then increases or decreases by 100 basis points every six months. On date 0. the prices of a six-month zero (A) and a 1-year zero (B) are 97.5610 and 95.0908 respectively. a) Find the risk-neutral probability of an up move on date 0 for the six-month rate process over the next 6-month. b) Find the price of the 1-year zero (B) in the down state of the binomial tree on date 1 (t-1).Suppose 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?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.
- A widely used utility function in the economics literature is the constant rate of risk aversion utility function. It is given by: u(c) = c*(1-n) (1-n) Assume that an agent lives for three periods (t-0,1,2) and discounts future utility at rate B (per period). The agent is born with asset level a, and his/her labour market income is yo and y, for periods O and 1 respectively, the agent retire in the last period (no labour income). The interest rate in this economy is r. Please answer the following questions based on the information displayed here. Choose the best option available. Select one: O a. The budget constrain in period t=2 is given by:C2+ ay az(1+r) O b. The budget constrain in period t=2 is given by: Cam a2(1+r) O C. The budget constrain in period t=2 is given by: u(c2)+ a a;(1+r) +ys O d. The budget constrain in period t=2 is given by: C2= az(1+r) +ya O e. The budget constrain in period t#2 is given by: C2+a a(1+r) +yaWhy does the limitation of Portfolio analysis is Naively following the prescriptions of a portfolio model may actually reduce corporateprofits if they are used inappropriately?0 Masterful Pocketwatches; the larger standard deviation indicates that Masterful Pocketwatches has less variability in its closing prices than Perfect Plungers Plus. O Perfect Plungers Plus; the smaller standard deviation indicates that Perfect Plungers Plus has a greater mean closing price than Masterful Pocketwatches. O Masterful Pocketwatches; the larger standard deviation indicates that Masterful Pocketwatches has a greater mean closing price than Perfect Plungers Plus. O Perfect Plungers Plus; the smaller standard deviation indicates that Perfect Plungers Plus has less variability in its closing prices than Masterful Pocketwatches.
- John and Peter are two representative consumers/investors who maximize the utility of consumption. John's utility of consumption is characterized as ln(x) + 2ln(y) while Peter puts more weight on the current consumption level and has a utility function of 2ln(x) + ln(y). John has a wealth of ($10, $20) thousand, while Peter has a wealth of ($20, $15) thousand now and next year, respectively. (a) What are the optimal consumption plans forJohn and Peter,respectively,if the interest rate is 5% per annum? (b) If John and Peter are the only investors/consumers, what is the equilibrium interest rate? (c) Further to part (b), how much do they borrow or lend to each other?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.Studies have concluded that a college degree is a very good investment. Suppose that a college graduate earns about 75% more money per hour than a high-school graduate. If the lifetime earnings of a high-school graduate average $1,200,000, what is the expected value of earning a college degree?
- 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.Suppose you work for a robo-advisory firm and are interested in modeling your clients' consumption and saving decisions using a simple, two-period model. For all parts of this problem, assume your clients' utility functions satisfy the assumptions we discussed in class (i.e., utility is increasing and concave). Consider the case of a representative client. This client's current income is $100 and their current real wealth is zero. They have signed a contract for next year, promising them future income equal to $120. Suppose the real interest rate is 5% per year, and the client faces no borrowing constraints. a) What is the client's inter-temporal budget constraint? First, derive the budget constraint math- ematically. Then, illustrate the constraint graphically, indicating the x- and y-intercepts, the no borrowing/no saving point, and the slope of the constraint. b) Suppose in the baseline scenario described in the problem, the client's preferences are such that they are a saver. Add…From the information generated in the previous two questions;a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-50 investment allocation in each investment alternative b) Compute the expected return of the portfolio thus formed c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?