Why is it so important to understand your personal finances? What types of problems are more common among people who do not have their finances under control? Why is it so important to understand your personal finances? A. It is important to understand your personal finances because understanding your personal finances will prevent divorce and other difficulties in personal relationships. B. It is important to understand your personal finances because there will be an exam at the end of the term. C. It is important to understand your personal finances because you need to know what your credit card interest is so that you can pay the balance off quicker. Once the balance is paid off, you can then invest in the stock market. D. It is important to understand your personal finances because you need to know how much money you have and how much money you spend in order to find a way to live within your means. What types of problems are more common among people who do not have their finances under control? A. People who do not have their finances under control suffer from financial stress because they usually have to pay an accountant to balance their checkbooks. B. People who do not have their finances under control suffer from financial stress, and have less friends. They also suffer from higher interest rates. C. People who do not have their finances under control suffer from financial stress, higher divorce rates, and other difficulties in personal relationships. They also suffer from higher rates of depression among a variety of other ailments. D. People who do not have their finances under control have higher marriage rates, and no difficulty in
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The mean-variance relationship has long been a focus in finance literature. Traditional financial theories propose a positive mean-variance relationship (Merton, 1973), i.e. bearing high (low) risk should be rewarded by high (low) returns. Empirical studies document at best inconclusive evidence with three mainstreams due to different economic settings and volatility model selection. French et al. (1987), Scruggs (1998), Ghysels et al. (2005), Lundblad (2007), Pastor et al. (2008), Brandt and Wang (2010), and Rossi and Timmermann (2015), among others, find the risk-return tradeoff despite being less significant in some cases. On the other hand, Nelson (1991), Brandt and Kang (2004), Baker et al. (2011), Fiore and Saha (2015), and Booth et al. (2016), among others, document a negative mean-variance relationship. Turner et al. (1989), Glosten et al. (1993), Sun et al. (2017), and Wang et al. (2017), among others, report both positive and negative relationships between risk and returns. Behavioral financial theories highlight investor sentiment in influencing stock prices, despite the traditional ones positing that stock prices are the discounted future cash flows and arbitrage leaves little space for investor sentiment (Fama, 1965). De Long et al. (1990) argue that sentiment investors trading together brings systematic risk into stock markets. The risk originated from the stochastic shifts in investor sentiment imposes arbitrage limits on rational investors, impeding them from trading against noise investors. As a result, the mispricing caused by sentiment investors is persistent. Baker and Wurgler (2006) state two routes whereby investor sentiment can cause a persistent impact on stock prices: (i) uninformed demand shocks, and (ii) limits on arbitrage. Uninformed demand shocks naturally persist in that irrational investors' misbeliefs could be further strengthened by others 'on the bandwagon' (Brown and Cliff, 2005, p. 407). Limits on arbitrage demotivate arbitrageurs from relieving the impact of investor sentiment since they are commonly subject to relatively restricted investment horizons and can hardly accurately forecast how the impact will persist. Therefore, one can observe that high levels of optimism (pessimism) would cause high (low) concurrent returns, and given the mean-reversion property, overpricing (underpricing) would be corrected and followed by low (high) subsequent returns. Combining two streams of literature, Yu and Yuan (2011), by sampling the US stock market, evidence the risk-return tradeoff amid low-sentiment periods but not over high-sentiment periods. In line with the above-mentioned points, please prepare a report with a specific emphasis on the following seven requirements: Required: Discuss the theoretical underpinnings for empirical findings of Yu and Yuan (2011). [6 marks]
Ameer S.
Warren Buffy is an enormously wealthy investor who has built his fortune through his legendary investing acumen. He currently has been offered three major investments and he would like to choose one. The first one is a conservative investment that would perform very well in an improving economy and only suffer a small loss in a worsening economy. The second is a speculative investment that would perform extremely well in an improving economy but would do very badly in a worsening economy. The third is a counter-cyclical investment that would lose some money in an improving economy but would perform well in a worsening economy. Warren believes that there are three possible scenarios over the lives of these potential investments: (1) an improving economy, (2) a stable economy, and (3) a worsening economy. He is pessimistic about where the economy is headed, and so has assigned probabilities of 0.37, 0.42, and 0.21, respectively, to these three scenarios. He also estimates that his profits (in millions of dollars) under these respective scenarios are those given by the following table: Investment | Improving Economy | Stable Economy | Worsening Economy --- | --- | --- | --- Conservative | 0 | 0 | 0 Speculative | 30 | 15 | -15 Counter-cyclical | 30 | 10 | -5 Probability | 0.37 | 0.42 | 0.21
Croup C.
McGivern Jewelers is located in the Levis Square Mall just south of Toledo, Ohio. Recently it posted an advertisement on a social media site reporting the shape, size, price, and cut grade for 33 of its diamonds currently in stock. The information is reported below. $$ \begin{array}{|lccl|} \hline \text { Shape } & \text { Size (carats) } & \text { Price } & \text { Cut Grade } \\ \hline \text { Princess } & 5.03 & \$ 44,312 & \text { Ideal cut } \\ \text { Round } & 2.35 & 20,413 & \text { Premium cut } \\ \text { Round } & 2.03 & 13,080 & \text { Ideal cut } \\ \text { Round } & 1.56 & 13,925 & \text { Ideal cut } \\ \text { Round } & 1.21 & 7,382 & \text { Ultra ideal cut } \\ \text { Round } & 1.21 & 5,154 & \text { Average cut } \\ \text { Round } & 1.19 & 5,339 & \text { Premium cut } \\ \text { Emerald } & 1.16 & 5,161 & \text { Ideal cut } \\ \text { Round } & 1.08 & 8,775 & \text { Ultra ideal cut } \\ \text { Round } & 1.02 & 4,282 & \text { Premium cut } \\ \text { Round } & 1.02 & 6,943 & \text { Ideal cut } \\ \text { Marquise } & 1.01 & 7,038 & \text { Good cut } \\ \text { Princess } & 1.00 & 4,868 & \text { Premium cut } \\ \text { Round } & 0.91 & 5,106 & \text { Premium cut } \\ \text { Round } & 0.90 & 3,921 & \text { Good cut } \\ \text { Round } & 0.90 & 3,733 & \text { Premium cut } \\ \text { Round } & 0.84 & 2,621 & \text { Premium cut }\\ \hline \end{array} $$ $$ \begin{array}{|lccl|} \hline \text { Shape } & \text { Size (carats) } & \text { Price } & \text { Cut Grade } \\ \hline \text { Round } & 0.77 & \$ 2,828 & \text { Ultra ideal cut } \\ \text { Oval } & 0.76 & 3,808 & \text { Premium cut } \\ \text { Princess } & 0.71 & 2,327 & \text { Premium cut } \\ \text { Marquise } & 0.71 & 2,732 & \text { Good cut } \\ \text { Round } & 0.70 & 1,915 & \text { Premium cut } \\ \text { Round } & 0.66 & 1,885 & \text { Premium cut } \\ \text { Round } & 0.62 & 1,397 & \text { Good cut } \\ \text { Round } & 0.52 & 2,555 & \text { Premium cut } \\ \text { Princess } & 0.51 & 1,337 & \text { Ideal cut } \\ \text { Round } & 0.51 & 1,558 & \text { Premium cut } \\ \text { Round } & 0.45 & 1,191 & \text { Premium cut } \\ \text { Princess } & 0.44 & 1,319 & \text { Average cut } \\ \text { Marquise } & 0.44 & 1,319 & \text { Premium cut } \\ \text { Round } & 0.40 & 1,133 & \text { Premium cut } \\ \text { Round } & 0.35 & 1,354 & \text { Good cut } \\ \text { Round } & 0.32 & 896 & \text { Premium cut }\\ \hline \end{array} $$ a. Develop a box plot of the variable price and comment on the result. Are there any outliers? What is the median price? What are the values of the first and the third quartiles? b. Develop a box plot of the variable size and comment on the result. Are there any outliers? What is the median price? What are the values of the first and the third quartiles? c. Develop a scatter diagram between the variables price and size. Be sure to put price on the vertical axis and size on the horizontal axis. Does there seem to be an association between the two variables? Is the association direct or indirect? Does any point seem to be different from the others? d. Develop a contingency table for the variables shape and cut grade. What is the most common cut grade? What is the most common shape? What is the most common combination of cut grade and shape?
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