Consider a world of two countries, Highland (H) and Lowlanda. The average output of each country...

 

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Consider a world of two countries, Highland (H) and Lowlanda. The average output of each country is 9, and both countries aimed at equalizing consumption. Assume that all income takes the form of capital income and is consumed all over the period. a. Assume that two situations can occur: disease (pPestilence: P) and flood (Flood: F), and that the probability that each situation will appear is 50 percent, respectively. When the situation of P occurs, the production of H decreases to 8, but the production of L remains at 10. Conversely, when the situation of 1, the production of H remains at 10, but the production of L decreases to 8. Mark Situation P and Situation F in the two rows, respectively, and write an income table in the three columns by dividing them into portfolios that hold 100% domestic capital, 100% foreign capital, and 50% domestic capital and foreign capital, respectively. b. There are two situations (chaos [A: Consider Armageddonl and Heaven (U: Utopial) in addition. Assume that the probability of each situation occurring is 50%, and that it is independent of the P-F situation. When the situation of A occurs, the production of the two countries is further reduced by four units regardless of the P-F situation, and when the situation of U occurs, the production of the two countries is not affected at all. Mark the situation PA, PU, FA, and FU in each of the four rows, and write an income table in the three columns by dividing them into portfolios with 100% domestic capital, 100% foreign capital, and 50% domestic capital and foreign capital, respectively. (a) Compare the results in (b) and explain the selection process of the appropriate investment portfolio. Explain whether the consumption risk of diversifying investment can be eliminated in each case. Consider a world of two countries, Highland (H) and Lowlanda. The average output of each country is 9, and both countries aimed at equalizing consumption. Assume that all income takes the form of capital income and is consumed all over the period. a. Assume that two situations can occur: disease (pPestilence: P) and flood (Flood: F), and that the probability that each situation will appear is 50 percent, respectively. When the situation of P occurs, the production of H decreases to 8, but the production of L remains at 10. Conversely, when the situation of 1, the production of H remains at 10, but the production of L decreases to 8. Mark Situation P and Situation F in the two rows, respectively, and write an income table in the three columns by dividing them into portfolios that hold 100% domestic capital, 100% foreign capital, and 50% domestic capital and foreign capital, respectively. b. There are two situations (chaos [A: Consider Armageddonl and Heaven (U: Utopial) in addition. Assume that the probability of each situation occurring is 50%, and that it is independent of the P-F situation. When the situation of A occurs, the production of the two countries is further reduced by four units regardless of the P-F situation, and when the situation of U occurs, the production of the two countries is not affected at all. Mark the situation PA, PU, FA, and FU in each of the four rows, and write an income table in the three columns by dividing them into portfolios with 100% domestic capital, 100% foreign capital, and 50% domestic capital and foreign capital, respectively. (a) Compare the results in (b) and explain the selection process of the appropriate investment portfolio. Explain whether the consumption risk of diversifying investment can be eliminated in each case.

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a Situation P Situation F Portfolio 100 H Portfolio 100 H Capital Capital 9 10 Portfolio 100 L Portf... View the full answer