UGBA 103 Assignment _3 - However, the only insurance which...

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UGBA 103 Summer 2010 Haas School of Business John Gonzales Assignment #3 (due June 7) 1. Do problems 5-7, 5-10, 5-12 and 5-21 on pages 193-196 of the text. 2. Do problem 6-12 on page 236 of the text. Skip part (d). 3. An individual is considering investing in either the stock market, the bond market or a fully-insured bank account (i.e. zero risk) which offers a return of 4%. The individual has identified the following possibilities regarding the stock market. probability stock returns bond returns .25 2% 3% .40 8% 5% .35 11% 8% (a) Calculate the expected return, variance and standard deviation for stocks and bonds, and the covariance and correlation. (b) Which investment would a risk-averse individual undertake? Explain. How would your answer change if the bank account offered 7%? Explain. How would your answer change if the bank account offered 9%? Explain. 4. An individual owns a car that is worth $20,000, and is considering buying insurance.
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Unformatted text preview: However, the only insurance which is available has a maximum coverage of $15,000, i.e. the policy will pay only $15,000 if the car suffers a total loss in an accident. The price of the policy is $1,800. There is a 10% chance of having an accident in which the car is a total loss. The focus here is to calculate the expected values with and without insurance. It is not necessary to calculate the variance and standard deviation, as it is obvioua that there is less risk with insurance. (a) Will a risk-averse individual buy the insurance? Show your work and explain. (b) Will a risk-neutral individual buy the insurance? Show your work and explain. (c) Will a risk-loving individual buy the insurance? Show your work and explain. (d) How would your answer to (a)-(c) change if the policy paid $20,000 if the car was a total loss? Explain....
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This note was uploaded on 07/17/2010 for the course UGBA 18195 taught by Professor Johngonzales during the Summer '10 term at University of California, Berkeley.

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