ECON 2035 Study Guide - Midterm Guide: Demand Curve, Economic Equilibrium, Money-B
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Chapter 4: determining interest rates: portfolio choice, determinants of portfolio choice (determinants of demand for. Want to invest in assets with high-expected returns: risk: the degree of uncertainty in the return on an asset. That is, given the same expected return, will choose the asset that is less risky. Ex: assume you are deciding between two bonds. Bond a has a guaranteed return (r) of 10%. Bond b: has a 50% chance of having a 20% return and a 50% chance of having a 0% return. Calculate the expected return to bond a & bond b. = 1 1 + 2 ( 2) Bond b: 50% chance of 20% return and 50% chance of 0% This encourages borrowing so the quantity of bonds supplied will increase. As bond prices increases, holders of existing bonds will be more willing to sell them, thus increasing the quantity of bonds supplied.
