Topics missed Flashcards
Formula for Ert+1
Ert+1 = rf + γσ2 t
When question says: ‘Consider an investor with a power utility function who assumes that stock returns are log-normally distributed’, how to calculate share of wealth in stocks
αt = ((Et rt+1-rf )+ 0.5 {σt }2) / {γ{σt }2 }
Correlation between absolute risk aversion and wealth
Absolute risk aversion should decline with wealth
4 themes in household finance ideas
Horizon Effects and Life Cycle Stage:
Labor Income Risk:
Correlation of Labor Income with Stock Returns:
TDFs
Unexpected high stock returns today reduces what?
Unexpected high stock returns today reduces expected returns in the future when that correlation is negative so that high short term returns are offset by lower returns in the future.
Replacement rate of labour
the percentage of your salary paid to you
Second formula to calculate share of wealth in stocks
α*={Ert+1 − rf }/{γσ2 t } = Sharpe Ratio/{γσt }
Impact of the effect of higher expected income growth
impatient you spend so lower wealth accumulation in model
Generation of horizon effects (2)
Saving for retirement + time varying expected returns
Does myopic portfolio have horizon effects?
No horizon effects
Low stock market participation in many countries around the world - why?
demand for risky assets in different countries - need some financial wealth in order to participate in the stock market- so high financial wealth positively correlates with stock market participation.
China, Japan, Italy, Germany much much lower than US/UK/Nordics. Why might this be puzzling?
Positive expected excess return implies positive exposure in risky assets regardless of risk aversion * Possible explanations * Wealth, education, trust
Bequest motives meaning
Bequest motives refer to the desire of individuals to leave assets or wealth to their heirs or beneficiaries after their death.
