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lec01_03

# lec01_03 - ECON 4721H Money and Banking Lecture 01_03...

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Unformatted text preview: ECON 4721H Money and Banking Lecture 01_03 Satoshi Tanaka University of Minnesota September 16, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 01_03 Understanding Risk III Asset Prices and the Real Economy Satoshi Tanaka ECON 4721H Money and Banking Lecture 01_03 Today's Questions How the real economy a ects asset prices? If the following two assets have the same mean payo , which should be priced higher? Why? Stocks of the auto industry Stocks of the food industry Satoshi Tanaka ECON 4721H Money and Banking Lecture 01_03 Today's Points 1 Implications of the asset pricing formula. 1 Why p = E [ mx ] ? Why not p = E [ x ] ? 2 How the real economy a ects p = E [ mx ] ? 2 How good is the performance of this formula? 1 Why the performance is not good? Satoshi Tanaka ECON 4721H Money and Banking Lecture 01_03 Settings Two possible states; sunny day ( S ), and rainy day ( R ). ω ∈{ S , R } Probabilities, π S and π R where π S + π R = 1. Suppose we have the following securities; x 1 = ( x 1 ( S ) = 1 x 1 ( R ) = x 2 = ( x 2 ( S ) = x 2 ( R ) = 1 and their prices are p 1 and p 2 ....
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lec01_03 - ECON 4721H Money and Banking Lecture 01_03...

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