Week 3 Assignment Questions

Use a Cover Sheet, and. Upload to LiveText. Week 1 Assignment consists of four (4) questions from Chapter 2.

Chapter 5 Questions

Question 1

Use the figure above to analyze the effect of the following on the level of real interest rates:

Businesses become more pessimistic about future demand for their products and decide to reduce their capital spending.

Households are induced to save more because of increased uncertainty about their future Social Security benefits.

The Federal Reserve Board undertakes open-market purchases of U.S. Treasury securities, in order to increase the supply of money.

Question 2

What is the standard deviation of random variable q with the following probability distribution:

Value of q Probability

0 .25

1 .25

2 .50

Question 3

Given $100,000 to invest, what is the expected risk premium in dollars of investing in equities versus risk-free T-bills (U.S. Treasury bills) based on the following table:

Action Probability Expected Return

Invest in equities .6 $50,000

Invest in equities .4 ($30,000)

Invest in risk-free T-bill 1.0 $ 5,000

Chapter 6 Questions

Question 1

Which of the following choices best completes the following statement? Explain. An investor with a higher degree of risk-aversion, compared to one with a lower degree, will prefer investment portfolios:

With higher risk premiums

That are riskier (have higher standard deviations)

With lower Sharpe ratios

With higher Sharpe rations

None of the above is true

Briefly explain your choice.

Question 2

Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund. Your fund has an 18% rate of return, with a standard deviation of 28%. T-bill rate is 8%.

What is the expected value and standard deviation of the rate of return on the clients portfolio?

Question 3

The variable (A) in the utility formula represents the:

investors return requirement

investors aversion to risk

certainty equivalent rate of the portfolio

preference for one unit of return per four units of risk

Question 4

Using the figure above, which indifference curve represents the greatest level of utility that can be achieved by the investor?

Question 5

Using the figure above, which point designates the optimal portfolio of risky assets?