Problem Set Comparative Stats

Question 1

Has a higher risk aversion coefficient, amount in shares?

Answer 1

The share of wealth in stocks will be low

Question 2

Most consumers face high uncertainty about the promised pension payments they will receive due to government debt sustainability concerns and the ageing of the population. If, in a rare event, pensions replace 0% of the last wage (some recent proposals in the political campaign in the US have this feature for rich households), how does the investment choice get affected relative to the answer in (2)?

Answer 2

With a risk of no pensions, then households will go for safer portfolios. Again note that the precautionary saving motive is absent here, this would make the flight to safety even stronger here as more wealth might be accumulated if you know in advance that the pension system is unsustainable

Question 3

Most consumers face high uncertainty about the promised pension payments they will receive due to government debt sustainability concerns and the ageing of the population. If, in a rare event, pensions replace 0% of the last wage (some recent proposals in the political campaign in the US have this feature for rich households), how does the investment choice get affected relative to the answer in (2)?
If we stay with the assumptions in (5) but the increase in wages is 0%, how do the results change?

Answer 3

Lower share of wealth in stocks earlier as investors must be even more conservative because the PDV of labour income is even lower than before, this results in lower wealth accumulation because of lower exposure in stock market that earns higher average return.

Question 4

Markowitz-Merton model key assumption

Answer 4

The consumer does not change their saving behaviour. That is a key assumption