Suppose you identify 50 possible investments whose payoffs are completely independent of one another. All the investments have thesame expected value and standard deviation. You have $5,000 to invest. In terms of risk, would the benefit of spreading your $5,000across all 50 investments be the same, greater, or smaller compared with dividing your funds between just two investments?OYes. The gains from spreading your investments would be larger if you spread the $5000 across 50 investments.No. Because in this case diversification does not help to spread risk, it doesn't matter how many investments you spread your$5,000 across.No. Because the payoffs from these investments are independent, it doesn't matter how many investments you spread your$5,000 across, as there is no benefit in terms of reduced risk.O Yes. Because the payoffs from these investments are negatively correlated with one another, spreading your $5,000 across atarger number of investments reduces your risk.

Here, 50 investments are given and they all are independent from each other.

Answered: Suppose you identify 50 possible…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Let b(p,s,t) be the bet that pays out s with probability p and t with probability 1−p. We make the three following statements: S1: The CME for b is the value m such that u(m)=E[u(b(p,s,t))]. S2: A risk averse attitude corresponds to the case CME smaller than E[b(p,s,t))]. S3: A risk seeking attitude corresponds to a convex utility function. Are these statements true or false?
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The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neutral, not risk averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.
Any risk-averse individual would always (Select all that applies) a) take a 30% chance at $100 rather than a sure $20. b) take a sure $20 rather than a 30% chance at $100. c) take a sure $2 rather than a 50% chance at $5 and a 50% chance at losing $1. d) take a 50% chance at $5 and a 50% chance at losing $1 rather than a sure $1.
In a large casino, the house wins on its blackjack tables with a probability of 50.9%. All bets at blackjack are 1 to 1, which means that if you win, you gain the amount you bet, and if you lose, you lose the amount you bet. a. If you bet $1 on each hand, what is the expected value to you of a single game? What is the house edge? b. If you played 150 games of blackjack in an evening, betting $1 on each hand, how much should you expect to win or lose? c. If you played 150 games of blackjack in an evening, betting $3 on each hand, how much should you expect to win or lose? d. If patrons bet $7,000,000 on blackjack in one evening, how much should the casino expect to earn? a. The expected value to you of a single game is $ (Type an integer or a decimal.)
Consider a coin toss experiment and the following assets. Asset A gives £200 if the first is heads, £50 for tails. Asset B gives £200 if the second is heads and £50 for tails. Asset C is half of A plus half of B. Assets A and B are independent. Show that the expected value of each asset is the same and C reduces risk. Explain why C reduces risk?
You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table represents the annual return (per $1,000) of each of these investments under various economic conditions and the probability that each of those economic conditions will occur. Compute the expected return for the corporate bond and for the common stock fund. Show your calculations on excel for expected returns. Compute the standard deviation for the corporate bond fund and for the common stock fund. Would you invest in the corporate bond fund or the common stock fund? Explain. If choose to invest in the common stock fund and in (c), what do you think about the possibility of losing $999 of every $1,000 invested if there is depression. Explain.
In the Hawaiian Beach Boy surf board vendor scenario, what if the fine was increased to $190 but the probability of a fine decreased to one in 20 days, 5%? What would be the expected value – Exp(RS) -- of continuing to rent surfboards? Assume the other numbers stay the same. He makes $300/day and to rent boards from friends costs him $100 a day. So, he makes $200 a day. Write out the expected value formula, plug in the numbers, and show the math. Hint: the Exp(RS) should be higher than the previously calculated $160.
Economics Fenner Smith from Workouts 13.2 is an investor who has preferences for risk o and returnu given by the utility function u = min (µ, 4 –0). He plans to invest $40,000. The market rate of return is 8 percent and the risk-free rate of return is 2 percent. The risk on the market portfolio is 2 percent. a. How much of his $40,000 will a utility maximizing investor hold in the market portfolio? Show this as Bundle A in your diagram. b. The market return rises to 16 percent.How much of his $40,000 will he hold in the market portfolio. Show this as Bundle C in your diagram. c. Calculate the Hicksian ČV for this change. Show this in your diagram as Bundle B.
A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the same. C. The return on risk-free Treasury bills increases.
(a) Calculate the risk-premium on this portfolio and provide a brief interpretation of it (b) Calculate the minimum sale price of the capital assets for the average investor.
16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an…

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