Reference no: EM131248319
Value at risk" and benefits from diversification:-
This exercise looks at the impact of portfolio correlation on capital requirements. An entrepreneur has two identical fixed-investment projects. Each involves investment cost I. A project is successful (yields R) with probability p and fails (yields 0) with probability 1 - p. The probability of success is endogenous.
If the entrepreneur works, the probability of success is
and the entrepreneur receives no private benefit. If the entrepreneur shirks, the probability of success is pL = 0 and the entrepreneur obtains private benefit B. The entrepreneur starts with cash 2A, that is, A per project. We assume that the probability that one project succeeds conditional on the other project succeeding (and the entrepreneur behaving) is
(it is, of course, 0 if the entrepreneur misbehaves on this project). α ∈ [-1, 1] is an index of correlation between the two projects. The entrepreneur (who is protected by limited liability) has the following preferences:
(i) Write the two incentive constraints that will guarantee that the entrepreneur works on both projects.
(ii) How is the entrepreneur optimally rewarded for R¯ large?
(iii) Find the optimal compensation scheme in the general case. Distinguish between the cases of positive and negative correlation. How is the ability to receive outside funding affected by the coefficient of correlation?
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Will its position he disturbed by such a rise in
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What costs might such restrictions involve
: On its money supply? Can it offset either of these effects through domestic open-market operations? & How might restrictions on private financial account transactions alter the problem of attaining internal and external balance with a fixed exchan..
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Determined by dividing the appropriate costs
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Code of ethics and business conduct
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Write the two incentive constraints
: Write the two incentive constraints that will guarantee that the entrepreneur works on both projects. - How is the entrepreneur optimally rewarded for R¯ large?
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What are the geological features of the selected region
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Organization for the prohibition of chemical weapons
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An adjusting entry to convert an asset to expense consists
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Finance charge on the cash price
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