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Asked by abdulogli27 on coursehero.com

Assume that bonds pay a real return of 2%. Stocks pay 22% half the time and -6% half the

time. Suppose you initially have wealth of $100, and let X be your wealth after 1 year. What fraction of

your wealth should you hold in stock under each of the following assumptions? (You can solve this

question by hand)

a) (5 Points) You want to maximize the average value of X.

b) (5 Points) You want to be certain that X is at least $100 (that is, you don't lose any of your initial

wealth). Subject to that constraint, you maximize the average value of X.

Question-8 Using graphs, explain and show how each of the following events affects a country's net

capital outflows, net exports, and equilibrium real exchange rate. (You can solve this question by hand)

a) (5 Points) A rise in foreign interest rates.

b) (5 Points) An announcement that a tax cut will occur in the future.

Question-9 Suppose it takes $1.05 to buy 1 euro, the U.S. price level is 120, and the European price level

is 125. (You can solve this question by hand)

a) (5 Points) Calculate the real exchange rate for the U.S. against the euro.

b) (5 Points) Suppose the U.S. price level rises to 130. Calculate the real exchange rate again and explain

why it has risen or fallen.

Question-10 (5 Points) Suppose that, at a certain real exchange rate, a country's net exports exceed its

net capital outflows. Is the equilibrium exchange rate higher or lower than this level? Explain both in

words and with a graph. (You can solve this question by hand)

Question-11 (5 Points) Suppose you win the lottery. You have the choice between receiving the 25

annual payments of $1 million with the first payment happening immediately or an immediate (up-front

cash) payment of $17 million. Determine the present value difference between the two options given the

interest rate of 5%. (You can solve this question by hand)

Solved by verified expert

Answered by TeacherDayana on coursehero.com

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