Week 1 + 2 Flashcards
simple saving rule
simple saving rules (10-15 percent of income)
percent of financial wealth to be spent during retirement.
3-6 percent of financial wealth to be spent during retirement.
Retirement savings largely in equities, percentage in equities
100-age rule
equity premium formula
Ert+1 - rf = equity premium
knowing the amount to put in a risky asset equation/formula
equity premium / Risk aversion parameter (y) x SD squared
Higher gamma, more risk aversion - leads to what type of allocation
less allocation (likely recessionary environment)
*Finding out gamma likely on exam
Uncertainty formula
Uncertainty = variance/SD
During a recession, what happens to uncertainty, risk aversion and risk premium
- Uncertainty rises
- Risk aversion rises
- Higher risk premium/premia
Samuelson (1969) result on share of wealth in
stocks holds …
Samuelson (1969): above result (on share of wealth in
stocks) holds in multiperiod settings when returns are
assumed to be i.i.d. Independent and identically distributed random variables
Merton (1969) result on share of wealth in
stocks holds …
Merton (1969) showed above holds in continuous time
Relative risk aversion vs absolute risk aversion
Relative risk aversion measures how risk-averse an individual is relative to their wealth, while absolute risk aversion measures the individual’s risk aversion without considering wealth.
What are two conditions that investors can rebalance their portfolio every period?:
Classic results (Samuelson (1969) and Merton (1969)) give two conditions under which long-term investor acts myopically: If investor has power utility and returns are i.i.d.
Optimal portfolio weight formula
Optimal portfolio weight on a risky asset is mean excess log return divided by risk aversion times variance
Formula - the myopic component of asset allocation in a Merton-type model is
(Expected return-risk free rate)/ γ*σ2
