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Assume that bonds pay a real return of 2 percent. Stocks pay 22 percent half the time and -6 percent half the time. Suppose you initially have wealth of $100, and let X be your wealth after 1 year. What fraction of your wealth should you hold in stock under each of the following assumptions?
a. You want to maximize the average value of X.
b. You want to maximize the value of X when the return on stocks is -6 percent.
c. You want to be certain that X is at least $100 (that is, you don't lose any of your initial wealth). Subject to that constraint, you maximize the average value of X.
As of 09/17/2014, what was the expected interest rate on a one-year treasury bond on 09/17/2015? Please use the expectations theory. As of 09/17/2014, the expected interest rate on a one-year treasury bond If there the expected and the actual interes..
An insurance policy will pay you or your heirs $5000 a year for 40 years. If the first payment is received 15 years from today and the discount rate is 5%, what is the total value of the policy today? A. $41,269 B. $42,189 C. $43,333 D. $43,546 E. $4..
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Bank regulators require adequate capital levels in banks because:
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The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). What rate of return do you expect to ..
When storing corn there is spoilage, i.e. the amount of usable corn shrinks over time. Assume that corn spoils continuously at rate of 2% per month. Also, assume that corn storage carries fixed (upfront) costs of $0.20 per bushel per month. Describe ..
Suppose you consider buying a share of stock at a price of $55. The stock is expected to pay a dividend of $6 next year and to sell then for $57. The stock risk has been evaluated at β = 0.5. Using the SML, calculate the fair rate of return for a sto..
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