Analyse keyness model of liquidity preference, Financial Econometrics

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Problem :

PART A

(a) Analyse Keynes's model of liquidity preference.

(b) Analyse the instruments central banks use to control the supply of money in the economy.

PART B

(a) MITTEL is analyzing a new line of business and estimates the possible returns on investment as

2344_Analyse Keyness model of liquidity preference.png

Required: Determine the expected return and the standard deviation associated with the investment.

(b) The common stocks of DINAR Company and GINA Inc. have expected returns of 10% and 20% respectively, while the standard deviations are 5% and 10%. The expected correlation coefficient between the two stocks is 0.36. An investor wants to constitute a portfolio comprised of 40% of DINAR and 60% of GINA

(i) Explain the principle of diversification underlying the creation of the portfolio.

(ii) Determine the expected return and risk associated with the portfolio.


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