1. [ 3 points] If you want to give up $1000 worth of consumption in 2016 in orde
ID: 1221711 • Letter: 1
Question
1. [ 3 points] If you want to give up $1000 worth of consumption in 2016 in order to gain future benefits. In 2017, your principal investment might be worth $1400 with probability A or $800 with probability B. What is the value of A which gives a profitable investment?
2. [ 3 points] If the households Balance Sheet is given by the following formulas: Real assets + financial assets + liabilities = $550 billion. Net worth equals 1/4 of the real assets or 1/2 of the financial assets. a. Find the values of the financial and real assets? b. Find the value of the liabilities?
3. [ 4 points] a T-bill with $9,000 and 182 days to maturity, suppose the bond- equivalent yield YLD is 0.061%. Find the ASKED(%)?. Hint: you need to find the percentage, not the purchase price.
Explanation / Answer
Q1
Answer:
We have to find out expected value with arbitrary probability by trial and error method
suppose we find EV at 0.34 probability
EV=1400*0.34+800*0.66=1004
EV at 0.33
EV=1400*0.33+800*0.67=998
so for profit the probability A is greater than 0.33
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