3330%20PS1 - Cornell University Fall 2009 Economics 3330:...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Cornell University Fall 2009 Economics 3330: Problem Set 1 Due 9/14/09 1. Derivatives Solve for the first and second derivatives with respect to x for both a) (1+x) -t+2 and b) e rx. 2. Expected Value and Variance There are two securities: X and Y. Security X takes the values -2, 4, and 10 in states L, M and H with probabilities 0.25, 0.5, and 0.25, respectively. Security Y takes the values -6, 4, and 14 with the same probabilities a. What is the expected value of each security? b. What is the variance of each security’s value? c. Which security would you expect to be more expensive? Explain your answer. d. Now suppose that there is a trader who can purchase either one or the other of the securities. The trader will receive 20% of the value of the security above zero as compensation; i.e., the trader receives a portion of the gains but none of the losses. What is the expected value received by the trader for each security? Explain why it is possible that the trader would be willing to pay more for security Y than X. Now suppose that Security A takes the values -12, 3, and 4 in states L, M, and H with
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/22/2009 for the course ECON 3330 taught by Professor Mbiekop during the Fall '08 term at Cornell University (Engineering School).

Page1 / 2

3330%20PS1 - Cornell University Fall 2009 Economics 3330:...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online