Household saving in the United Kingdom and the United States rose significantly in 2008, even though the unemployment rate remained reasonably low (below 7%) in both countries. Discuss possible reasons for this trend in the light of theories of consumption. Effects of the 2008 financial turmoil hit the economic climate hard causing a shift in the behaviour of consumers as they decreased consumption and increased their savings rate. This is mainly due to erosion of confidence and high levels of
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1. Suppose your company’s method of making decisions under risk is “making the best out of the worst possible outcome.” What rule would you be forced to follow? The decisions under risk are (1) maximization of expected value, (2) mean-variance analysis, and (3) coefficient of variation analysis. The first two methods involve measuring the riskiness of probability distribution, variance and standard deviation of absolute risk, whereas the coefficient of variation measures risk relative to the expected
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Chapter 5 A firm has three investment alternatives. Payoffs are in thousands of dollars. a) Using the expected value approach, which decision is preferred? b) For the lottery having a payoff of $100,000 with probability p and $0 with probability (1 - p), two decision makers expressed the following indifference probabilities. Find the most preferred decision for each decision maker using the expected utility approach. c) Why don’t decision makers A and B select the same decision
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Case 3 Question 1 The T-bond return does not depend on the state of the economy because the interest payments will be made and the bond will be redeemed by the federal government, barring global disaster. The T-bond, since its return is independent of the state of the economy, is risk-free, but only in the nominal sense. An investor is “guaranteed” an 8.0 percent nominal return. However, the real realized return will depend on inflation over the next year. Thus, the real return, which
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can decide weight of four stocks by maximizing the utility of the portfolio. (N=4, T=232) So we suppose: 1. The best portfolio is the one that satisfy owner most, which means have the maxi utility. 2. The owner is afraid of risk, and the risk aversion is measured by γ, γ=3 3. The portfolio will be hold for one year. From equation: Rate=R1-R2R1 We can get return rates of four stocks in different periods since Jan-96 (See sheet 1), and the mean return rates μ for the four stocks are: DBS=0
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Chapter 9 Behavioral Finance and Technical Analysis The effiecient market hypothesis makes two important predictions. First, it implies that security prices properly reflect whatever information is available to investors. Second, active traders will find it difficult to outperform passive strategies such as holding market indexes. A relatively new school of thought dubbed behavioral finance argues that sprawling literature on trading strategies has missed a larger and more important point by
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Agency Problems and the Theory of the Firm Author(s): Eugene F. Fama Reviewed work(s): Source: Journal of Political Economy, Vol. 88, No. 2 (Apr., 1980), pp. 288-307 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/1837292 . Accessed: 17/10/2012 15:40 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps
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Explain the term structure of interest rates. What are the effects of rise in risk and expectations on the formation of long term rates? Interest rate within an economy is subject to many factors and as a result varies in relativity of those. The major factors are time period: short term Vs. long term investments, the degree of risk to which its exposed (AAA rated, mortgages, default, zero coupon…). Term structure of Interest rate is a significant tool for investors of bonds but also for policy
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Human Behavior and the Efficiency of the Financial System by Robert J. Shiller* Abstract Recent literature in empirical finance is surveyed in its relation to underlying behavioral principles, principles which come primarily from psychology, sociology and anthropology. The behavioral principles discussed are: prospect theory, regret and cognitive dissonance, anchoring, mental compartments, overconfidence, over- and underreaction, representativeness heuristic, the disjunction effect, gambling
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What is Risk Management? Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses. The potential return from any investment is generally depending to the amount of risk the investor is willing to assume. Investors will not take on greater risks without the possibility of higher earnings. This is called the
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