An investor is contemplating an investment with a retum of R, where: R=300,000-500,000 where U is...

 

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An investor is contemplating an investment with a retum of £R, where: R=300,000-500,000 where U is a uniform [0, 1] random variable. Calculate each of the following four measures of risk: (a) variance of return (b) downside semi-variance of return shortfall probability, where the shortfall level is £100,000 Value at Risk at the 5% level. (d) (i) Define first-order and second-order stochastic dominance. Illustrate the definitions by sketching cumulative distribution functions of two random variables which spent the retume on two investments, one of which dominates the other. [5] (i) Explain how an investor's economic characteristics will affect his choice of an investment that: (a) first-order stochastically dominates another (b) second-order stochastically dominates another. [3] [Total 8] An investor is contemplating an investment with a retum of £R, where: R=300,000-500,000 where U is a uniform [0, 1] random variable. Calculate each of the following four measures of risk: (a) variance of return (b) downside semi-variance of return shortfall probability, where the shortfall level is £100,000 Value at Risk at the 5% level. (d) (i) Define first-order and second-order stochastic dominance. Illustrate the definitions by sketching cumulative distribution functions of two random variables which spent the retume on two investments, one of which dominates the other. [5] (i) Explain how an investor's economic characteristics will affect his choice of an investment that: (a) first-order stochastically dominates another (b) second-order stochastically dominates another. [3] [Total 8]

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a Calculation of risk measures 1 Expected return The expected return of the investment can be calculated as the mean of the random variable representing the return Since the return is uniformly distri... View the full answer