Consider an investment that pays off $800 or $1,400 per $1,000 invested with equal probability. Suppose you have $1,000 but are willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of $3,000?
Answer to relevant QuestionsWhy is it important to be able to quantify risk? Suppose, as in Problem 17, that there were ten independent investments available rather than just two. Would it matter if you spread your $1,000 across these 10 investments rather than two? Plot the difference since 1979 between the Moody’s Baa bond index (FRED code:BAA) and the U.S. Treasury 10-year bond yield (FRED code:GS10). Comment on the trend and variability of this “credit risk premium” (Chapter) ...A 10-year zero-coupon bond has a yield of 6 percent. Through a series of unfortunate circumstances, expected inflation rises from 2 percent to 3 percent.a. Assuming the nominal yield rises in an amount equal to the rise in ...Use the model of supply and demand for bonds to determine the impact on bond prices and yields of expectations that the real estate market is going to weaken. (LO3)
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