Consider two possible investments whose payoffs are completely independent of one another. Both investments have the same expected value and standard deviation. If you have $1,000 to invest, could you benefit from dividing your funds between these investments? Explain your answer.
Answer to relevant QuestionsSuppose, 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? Another way to understand stock market risk is to examine how investors expect risk to evolve in the near future. The DJIA volatility index (FRED code: VXDCLS) is one such measure. Plot the level of this volatility index ...You are considering purchasing a consol that promises annual payments of $4.a. If the current interest rate is 5 percent, what is the price of the consol?b. You are concerned that the interest rate may rise to 6 percent. ...Use your knowledge of bond pricing to explain under what circumstances you would be willing to pay the same price for a consol that pays $5 a year forever and a 5-percent, 10-year coupon bond with a face value of $100 that ...Graph investors’ long-term expected inflation rate since 2003 by subtracting from the 10-year U.S. Treasury bond yield (FRED code: GS10) the yield on 10-year Treasury Inflation Protected Securities (FRED code: FII10). Do ...
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