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ECON 351 (21)
Chapter 4

Chapter 4_Determining Interest Rates.docx

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ECON 351
Frank Sorokach

Chapter 4: Determining Interest Rates  Determinants of Portfolio – Investors use the following determinants of portfolio choice or determinants of asset demand to evaluate different investment options: 1. The saver’s wealth or total amount of savings to be allocated among investments 2. The expected rate of return from an investment compared with the expected rates of return on other investments 3. The degree of risk in an investment compared with the degree of risk in other investments 4. The liquidity of an investment compared with the liquidity of other investments 5. The cost of acquiring information about an investment compared with the cost of acquiring information about other investments  Expected Rate of Return - Below calculation determines safer and unsafe investment Investment #1:50% of 4% Return [Low End] 50% of 8% Return [High End] Investment #2:40% of 7% Return 60% of 8% Return 1. 2 + 4.5 = 6.5% 2. 2.8 + 4.8 = 7.6%  BETTER INVESTMENT  Risk - Risk Averse – choosing between two assets with the same expected returns, they would choose the asset with the lower risk. Investors will invest in an asset that has greater risk only if they are compensate by receiving a higher return. - Risk Lov
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