You have $1,000 to invest and are considering buying some combination of the shares of two companies, DonkeyInc and ElephantInc. Shares of DonkeyInc will pay a return of 12 percent if the Democrats are elected, an event you believe to have a 40 percent probability; otherwise the shares pay a zero return. Shares of ElephantInc will pay 10 percent if the Republicans are elected (a probability of 60 percent), zero otherwise. Either the Democrats or the Republicans will be elected.

Instructions: Enter your response as percentage rounded to one decimal place.

a. If your only concern is maximizing your average expected return, with no regard for risk, you should invest your $1,000 in and your expected return will be ______%.

b. What is your expected return if you invest $500 in each stock? (Hint: Consider what your return will be if the Democrats win and if the Republicans win, then weight each outcome by the probability that event occurs.)

Instructions: Enter your response as percentage rounded to two decimal places.

Expected rate of return: ______%

d. Devise an investment strategy that is riskless, that is, one in which the return on your $1,000 does not depend at all on which party wins.

Instructions: Enter your responses rounded to two decimal places.

You should invest $ ______in ElephantInc and $_____ in DonkeyInc.

e. Using the investment strategy devised in part d, you will earn______ % regardless of which part wins.

A countrys domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations:

S = 1,200 + 2,000r

I = 1,700 4,000r

KI = -100 + 6,000r

a. Assuming that the market for saving and investment is in equilibrium, find the current values for national saving, capital inflows, domestic investment, and the real interest rate.

Instructions: Enter real interest as percent values rounded to one decimal place. If you are entering any negative numbers, be sure to include a (-) in front of those numbers.

Real interest: %

National Savings:

Capital inflows:

Investment:

b. Assuming that desired national saving declines by 120 at each value of the real interest rate. Determine the effects of this reduction in domestic saving on the following values:

Real interest: %

National Savings:

Capital inflows:

Investment:

c. Assume instead that concerns about the economy's macroeconomic policies cause capital inflows to fall sharply so that now KI = -760 + 6,000r. Determine the effects of this reduction in capital inflows on the following values:

Real interest: %

National Savings:

Capital inflows:

Investment: