FINANCIAL ECONOMICS

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RP1_SP20_template03.xlsx
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I

SP500 RIO N 252 SP500 RIO return on SP500 RIO
Date CLOSE return r2 retSP-avgSP CLOSE return r2 retRIO-avgRIO M 1 Expected value(return) 9/5/19
1/18/19 2670.709961 51.639999 Variance
1/22/19 2632.899902 -0.014258 0.000203 -0.014258 50.310001 sd
1/23/19
1/24/19 Cov formula
1/25/19 COVAR function
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1/30/19 Asset Summary Asset type Sector Industry Exchange
1/31/19 Matrix
2/1/19 SP500
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2/8/19 RIO
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2/19/19 hint use the profile tab under yahoo finance for each asset
2/20/19 Asset type: Stock / Bond / ETF / Currency / Mutual Fund / Index
2/21/19 Exchange: NYSE, NASDAQ, LSE, Euronext, ASX, SEHK.. Etc
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https://finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC https://finance.yahoo.com/quote/RIO/history

II

A gamble based on a fair coin toss which pays $250 if the coin lands heads and $20 if the coin lands tails. ( fair coin toss i.e. probability of heads is 50% = probability of tails is 50%)
250 20
EV
E[U(w)] U[EV] > < = risk attitude
u(w) 5ln(w) EU__U(EV)
u(w) 5w2 EU__U(EV)
u(w) 250-w EU__U(EV)
A risk agent, whose utility is given by U(w) = 5ln(w) and initial
wealth is $10,000 is faced with a potential loss of $3,500 with a probability
of p= 0.20. What is the maximum premium they would be willing to pay to
protect themselves against this loss?
risk appetite wT p
EV intial wealth 0
EU 10,000
U(w-y) = E[U(w)] -3,500
5ln(10,000-y)=B17
find y
y= If you are given the opportunity to buy insurance for $450
alt y = would you take the insurance?
Utility functions w>0
quad b>0
u(w) 250-w u(w) w-5w2
u'(w) u'(w)
u''(w) u''(w)
A'(w) A'(w)
R'(w) R'(w)
A(w) A(w) =
A'(w) A'(w) =
R(w) R(w)=
R'(w) R'(w) =

Extra

What is the difference between QE and Open market Operations (OMO)?
What is a repo agreement? And why does the Fed construct these repos?
Why did the Fed issue $82B in financial markets in Jan 2020?