Financial Economics V 3025 Rajiv Sethi Phone: 854 5140 Problem Set 1 Due Date: Tuesday February 5 1. (a) Let P denote the price paid per hundred dollars in face value. Since the market clearing discou
Financial Economics V 3025 Rajiv Sethi Phone: 854 5140 Problem Set 2 1. If she sells n shares at $7 each, his balance sheet will be as follows Assets Liabilities & Net Worth Cash 7n + 5000 Value of Sh
RFS Advance Access published December 21, 2013
Opaque Trading, Disclosure, and Asset
Prices: Implications for Hedge Fund
Regulation
David Easley
Department of Economics, Cornell University
Maureen OHa
1. The Risk Lover has a concave function, and is happy to engage
in gambles. He requires less compensation to take a risk.
c. Our fundamental assumption in finance is that investors are Risk Averse. W
Financial Econ Notes
I. Premiums, Risk, and Risk Aversion
A. Holding-Period Return
1. This is the rate of return over a given period.
2. Can be solved with this equation:
a. HPR
i. is the price at the
i. = weight of Risky Asset 1 in P
ii. = weight of Risky Asset 2 in P
iii.
b. Portfolio Expected Return
i.
c. Portfolio Variance
i.
d. Standard Deviation
i.
e. Portfolio where S&P and Counter-Cyclical
4. You can also measure the risk by finding the variance and standard deviation. This measures
the volatility in outcomes, or how different the outcomes are. The higher the standard deviation,
the mor
A.
iv. This is a measure of compensation per unit of risk we are taking on when we
The lower the ratio means the less the investor
is compensated.
v. Another Example
A. The = 10% and = 18%. This shows
Utility
D. To find the Utility of $100 in the gamble, or while NOT investing in
the $100 with certainty, you draw a straight line between the two points
dictated by the possible outcomes.
E. This Grap
0
ii. The graph shows that Investor B is more risk averse than Investor A. This is
because when you move from the risk free rate of zero towards you will notice
that Investor B requires more compensat
1
2
High and Low
Means Higher Expected Return
and Lower Risk
Always Preferred
3
High and High
Means Higher Expected Return
and Higher Risk
Unknown Preference
It depends on which weighs more
4
Low and
1
Lecture 5 - The Market for Foreign Exchange
Foreign Exchange Market Every three years, the Bank for International
Settlements, the BIS, does a major survey of the foreign exchange markets. In the
la
J SUMMARY OUTPUT: TOYOTA
Regression Statistics
Multiple R 0.436597
R Square 0.190617
Adjusted R Square 0.176662
Standard Error 5.970735
I Observations 60
ANOVA
_._
df SS MS F Signicance F
Regression
Ultimately, it is true that real assets do determine the material well heingof an
economy. Nevertheless, individuals can benet when nancial engineering creates
new products that allow them to manage t
Subjective Probability and Expected Utility without Additivity
Author(s): David Schmeidler
Source: Econometrica, Vol. 57, No. 3 (May, 1989), pp. 571-587
Published by: The Econometric Society
Stable UR
Does The CAPM Hold Under RDEU?
Hui Huang
Xiaojun Shi
Shunming Zhang
August 24, 2009
Abstract
This paper extends the classic Capital Asset Pricing Model (CAPM) to a more general
non-expected utility ca
Two-Stage Lotteries without the Reduction Axiom
Author(s): Uzi Segal
Source: Econometrica, Vol. 58, No. 2 (Mar., 1990), pp. 349-377
Published by: The Econometric Society
Stable URL: http:/www.jstor.or
Econometrica, Vol. 73, No. 6 (November, 2005), 18491892
A SMOOTH MODEL OF DECISION MAKING UNDER AMBIGUITY
BY PETER KLIBANOFF, MASSIMO MARINACCI, AND SUJOY MUKERJI1
We propose and characterize a model
Financial Economics
Due: Tuesday, March 3, 2015
Problem Set 5
1. The standard size of a gold futures contract trading on the Chicago Mercantile Exchange is
100 troy ounces. Prices are quoted as dollar
Sustainable Development Final
12/18/2013
Before the Midterm
Basics: Lectures 1-5
Deductive method: start with assumed axioms to reach deduced
conclusions if a then b then c
Inductive method: find tr
CHAPTER 8: EFFICIENT MARKETS
AND THE BEHAVIORAL CRITIQUE
The assumptions consistent with efcient markets are (a) and (c). Many
independent, prot-maximizing participants [statement (a)] leads to efcien
CHAPTER 14: OPTIONS MARKETS
1. c is false. This is the description of the payoff to a put, not a call.
2. c is the only correct statement.
3. Each contract is for 100 shares: $7.25 x 100 = $725
Cost P
5. True. Under the expectations hypothesis, there are no risk premia built into bond
prices. The only reason for longterm yields to exceed ' '
. . short-term elds
expectation of higher short-term rate
Recession
.30
20%
-10%
a. The Counter-Cyclical stock has the following values
i. Expected Return:
A.
B.
ii. Variance
A.
B.
iii. Standard Deviation
A.
B.
2. When we have the bad outcome on the S&P, we
wealth towards the Risky Asset. You need to be
compensated with higher Expected Returns because you
are Risk Averse.
2.
a. This is because the Variance of the Risk-Free asset is
zero and the Covarianc
a. The portion we know we will NEVER choose, is colored in blue between Points D and
M. These are any portfolio with a greater weight to Debt than the Minimum Variance
Portfolio. There will always be
E. The Graph explains that through diversification, it is possible to reduce
your risk.
F. Point M is the minimum point, where increasing your allocation to
Equities no longer reduces risk, but increa
and set the equation to zero
i. To find it you take the derivative with respect to
A.
,
B.
,
C.
5. Combine our Weight to Expected Return and our Weight to Risk Graphs.
a.Expected Return is on the vert
A. We know the Standard Deviation is just the weighted sum of the
individual assets Standard Deviations in the case when we have perfectly
positive correlated assets.
1.
2. This demonstrates a linear
Risky, p
.085
.015525
.1246
Risk-Free, f
.04
0
0
1. Solve for
a.
i. This means that 58% of our wealth should be allocated to the Risky Asset
ii. Also that (1-.58) = .42, meaning 42% goes towards the R
i. When the Risk-Free rate increases, the CAL flattens, but the vertical intercept
increase, while maintain the same point P, which is the point in which you
allocate all your wealth into the Risky As
A.
less increase in Expected Return to take on more Risk than the original
investor.
) will be to the right of the original
b.
investor (
).
i. Investor B has allocated more of his wealth towards the
borrowing cost. The greater the borrowing rate, the flatter
the line is going to be.
c. Risk Aversion Determines how far past point P you are willing to go, as well as
determines the point along the C
i. The Portfolio Opportunity Set is linear.
ii. As you increase risk, you increase the return. There is no benefit to
diversification, as we cannot increase our return without increasing risk.
g. If t