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0answers
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Probability of states of nature

I've been given the following question and would really appreciate any help on part a. I've looked over all of my resources for this course and we have always been given the probability of the ...
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2answers
72 views

What is the necessity of the FDIC in the US banking system?

A bank's basic function is to "borrow short and lend long". In other words, it borrows money from depositors over the short term, promising to repay it on demand, while it lends most of that money out ...
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1answer
25 views

How to evaluate if an activity is likely to produce a positive ROI?

I am trying to establish if it would be worth my while to sell a product in a particular online marketplace but am unsure how to evaluate if it would be financially worth my while. The marketplace in ...
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6answers
113 views

What metrics would indicate a house bubble rather than genuine market values?

There is concerns that Auckland, New Zealand, is currently experiencing a housing bubble. Auckland is one of the top 10 cities in the world on a housing unaffordability index. The question is - ...
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0answers
37 views

What can we conclude from the overdetermined equity premium puzzle?

The equity premium: A puzzle (Mehra and Prescott (1985)) lays out the basic problem with equity returns: Restrictions that a class of general equilibrium models place upon the average returns of ...
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1answer
53 views

Question about constant relative risk aversion

The question: Consider a person with constant relative risk aversion $p$. (a) Suppose the person has wealth of $100,000$ and faces a gamble in which he wins or loses $x$ with equal probabilities. ...
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1answer
67 views

Intuition behind risk premium

In Lecture 20 of MIT's Microeconomics course, a situation is proposed where a 50/50 bet will either result in loosing $$100 or gaining $125 with a starting wealth of $100. It is stated that a person ...
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0answers
14 views

How can I construct a process for cumulative returns that is riskless?

This question is a little more specific than the title. Here I use the same notation that is set forth in this other question about cumulative returns (the sum of return observations). That is, let ...
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1answer
44 views

Multiplicative factorization of stochastic growth time series--solving for an eigenfunction/eigenvector

I'm trying to understand the tools used/presented in Lars Hansen's Econometrica paper "Dynamic Valuation Decomposition within Stochastic Economies." In a part in the paper, Hansen introduces a ...
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3answers
114 views

What are alternative measures of risk?

In finance, the variance of the returns of a security are used as a proxy for the associated risk of the security. I've seen some books include sentences like "if you take variance as a measure of ...
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2answers
76 views

Definition of Absolute Risk Aversion

In its Wikipedia article, absolute risk aversion is defined as $ARA = -\frac{u''(c)}{u'(c)}$. However, I have alternatively seen absolute risk aversion defined as half the decrease in consumption ...
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2answers
59 views

What are the economic justifications of the size premium?

What are the economic justifications of the size premium? In factor pricing models like the intertemportal capital asset pricing model (I-CAPM) or arbitrage pricing theory (APT), it is assumed that ...
4
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1answer
75 views

Portfolio choice of a risk lover

Take the standard portfolio choice problem as presented in MWG (p.188-189), but with a risk loving decision maker: with initial wealth $w$ invests an amount $\alpha$ in a risky asset with a random ...
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1answer
60 views

Absolute vs Relative Risk Aversion

Are there results that says the monotonicity of one measure of risk aversion implies the monotonicity of the other measure? For example, Does constant relative risk aversion imply decreasing ...
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2answers
397 views

What is the importance of Epstein-Zin preferences?

I've heard that there is a lot of work being done recently that applies Epstein-Zin preferences. The Wikipedia page doesn't seem to be very full. Why are Epstein-Zin preferences important? How does ...
2
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1answer
63 views

How is momentum justified as a common risk factor?

Momentum as a common risk factor? This question is partly a follow-up to another question found here. In this other question it was noted in momentum is difficult to explain as a common risk factor ...