HW2_solution

# HW2_solution - Econ 4751 Solution to HW 2 Learning about Return and Risk from the Historical Record 1(15 A r =(1 R(1 I 1 1.10 1.05 1 = 4.8 B 6.29 C

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

Econ 4751 Solution to HW 2 Learning about Return and Risk from the Historical Record 1 . (15’) A) r = (1+R) / (1+I) - 1; 1.10% / 1.05% - 1 = 4.8%. B) 6.29%. C) i_norminal > i_inflation 2. (10’) A) (1.0125) 4 -1 = 5.09% B) (1+x/n)^n--- exp(x) 3. (15’) A) HPR = .30 (18%) + .50 (12%) + .20 (-5%) = 10.4% B) s = [.30 (18 - 10.4) 2 + .50 (12 - 10.4) 2 + .20 (-5 - 10.4) 2 ] 1/2 = 8.13% C) s = [.30 (18 - 10.4) 2 + .50 (12 - 10.4) 2 + .20 (-5 - 10.4) 2 ] = .6604% Risk Aversion and Capital Allocation to Risky Assets 4. (10’) A) U(c) = 0.21 - 4/2(0.16) 2 = 15.88%, highest utility of choices B) If you are risk neutral, your only concern is with return, not risk.

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

View Full Document
5. (10’) A) For \$100, (115 - 100)/100 = 15%; .15 = w 1 (.12) + (1 - w 1 )(.05); .15 = .12w 1 + .05 - .05w 1 ; 0.10 = 0.07w 1 ; w 1 = 1.43(\$100) = \$143; (1 - w 1 )\$100 = -\$43. B) E(r p ) = .1 .1 = 5w + 12.4(1 - w); x = 0.32 (weight of T-bills); As composition of X and Y are .6 and .4 of P, respectively, then for 0.68 weight in P, the respective weights must be 0.41 and 0.27;
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 02/17/2011 for the course ECON 4751 taught by Professor None during the Spring '11 term at Algoma University.

### Page1 / 2

HW2_solution - Econ 4751 Solution to HW 2 Learning about Return and Risk from the Historical Record 1(15 A r =(1 R(1 I 1 1.10 1.05 1 = 4.8 B 6.29 C

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

View Full Document
Ask a homework question - tutors are online