School of Humanities and Social Sciences Midterm Assignment (ECO 623) Winter Semester, 2021
Instructions: a. Write on a plain paper and then scan and then submit from Q 1 to 8 b. Q 9 in excel file c. Submission Date: 19 April
Questions (1 to 8, 10 marks, Q 9: 20 marks)
1. Why is it useful to disassociate consumption and income across time? 2. Define Consumption smoothing. How financial institutions play an important role in determining consumption smoothing across time. 3. Explain the shape (graph) of risk averse, risk neutral and risk loving investors. 4. Derive the function of absolute risk aversion and relative aversion by using consumption smoothing under uncertainty model and in the context of risk premium and certainty equivalent wealth. 5. What do you mean my prudence? Explain the concept of relative and absolute prudence. 6. Explain the saving problem in the following two scenarios: a. Concave utility function: when the investor is risk averse b. Convex utility function: when the investor is risk loving 7. Explain the portfolio problem and relevant theorems with real life examples. 8. Explain the risk diversification through portfolio construction. In this case, which risk is relevant and which risk is not. Can we create a zero risk portfolio? If yes, what are the necessary conditions and formulations? 9. Assignment on Excel: You have to optimize of portfolio stocks including the followings: a. Select 5 stocks from different industry in Bangladesh for creating a portfolio. (Sheet 2) b. Estimate the portfolio return and risk after considering the equal weight for each stock. (Sheet 2) c. Explain the reasoning behind selecting these stocks? (Sheet 1) d. Do you choose stocks with positive correlation or negative correlation? Calculate the coefficient of correlation among these stocks (Sheet 3) e. By using the solver estimate the followings: (Sheet 4) i. Optimize the portfolio for given risk, maximize return ii. Optimize the portfolio for given return, minimize risk iii. Maximize the Sharpe ratio f. Summarize the results of b, e(i), e (ii), e (iii). (sample is given below, however you can make your own) (Sheet 5) g. Did you find any differences among the results in part (f), why? Explain. (Sheet 6) h. Are you risk averse, risk neutral and risk taker? Tell me in the context of your portfolio choice. (Sheet 7) Portfolio Return Portfolio Risk