Econ 393 Assignment 1

| August 14, 2017

I.ISP500 & XOM (Sep 16,2013 – Sep 14,2014)(30 pt)1. Download the last year daily close prices for SP500 index from yahoo financea. http://finance.yahoo.com/q?s=%5EGSPC2. Download the last year daily close prices for ExxonMobil (XOM) from yahoo financea. http://finance.yahoo.com/q?s=XOM3. Import daily close values into excel and computea. Log returnb. Expected returnc. Variance – mean zero theoretical formulad. Standard Deviatione. Covariance – theoretical formula and the COVAR excel functioni. Comment on the covariance you computedNote: When calculating above statistics, make sure your M (# of variables) is consistent with # of returnsi.e. if you have 10 daily close prices you will have 9 daily returnsIIUtility analysis and risk attitudesII.IA gamble based on a fair coin toss which pays $45 if the coin lands heads and $32 if the coinlands tails. ( fair coin toss i.e. probability of heads is 50% = probability of tails is 50%)(30 pt)1. Calculate the Expected value of this gamble2. Calculate Expected utility functiona. u(w) = 8w classify the risk attitudeb. u(w) = ln(w) classify the risk attitudec. u(w) = 2w2 classify the risk attitudeII.IIA risk averse agent, whose utility is given by u(x) = ln x and wealth is $50, 000 is faced with apotential loss of $10, 000 with a probability of p = 0.1. What is the maximum premium they would bewilling to pay to protect themselves against this loss? ( i.e. probability of earning 0 is 0.9 and probabilityof losing 10,000 is 0.1)(25 pt)1. Find expected value2. Find the expected utility (of wealth)3. Find the maximum premium to equate the two???? ? ??? = ??[???????]4. Compare the maximum risk premium (y) to the expected loss ( wealth – expected value)II.IIICalculate and classify the following utility functions according to the absolute and relative riskaversion(15 pt)1. u(w) =ln(w)2. u(w) = w-bw2

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