Can anyone help with Economics?

Question

Can anyone help me with these questions? I would appreciate any help that I can get. Thanks!

1.Portfolio diversification: a) reduces the likelihood that the entire amount invested will be lost, b) eliminates all risk of loss, c) ensures that investors will receive a positive rate of return, d) provides the maximum possible rate of return from an investment portfolio.

2.The rate of return on short-term U.S. government bonds is often regerred to as the a) federal funds rate, b) discount rate, c) risk-free interest rate, d) yield rate.

3.Company A consistently earns rates of return of 12 percent per year, while company B regularly generates rate of return of 8 percent per year. If you are attempting to arbitrage, you will: a) sell your stock in company B and buy more stock in company A, b) sell your stock in company A and buy more stock on company B, c) keep your portfolio balanced with an equal number of shares of each stock, d) buy stock in other companies in an effort to diversify and minimize risk.

4.The creation of markets for pollution rights would provide: a)neither an incentive not to pollute nor revenue for environmental improvement, b) fund for environmental improvement, but would not provide an incentive to refrain from polluting, c) an incentive not to pollute, but would not provide fund for environmental improvement, d) both an incentive not to pollute and revenue which could be devoted to environmental improvement.

5.Other things equal, if a full-employment reallocated a sustancial quantity of its resources to capital goods, we would expect: a)present consumption to rise, b) future consumption to fall, c) a lower rate of growth of real GDP, d) labor productivity to rise.

I would appreciate any help... :) thanks

Answer 1

Ill do my best!

1. A (100% sure) As this is spreading your investments around into multiple investment, it helps reduce the risk as if you put it all into one company and it went broke, you go broke!

2. A (70% sure) Im in Australia, and havent looked at the US bonds much, but we would call it the cash rate... Rate at which interest is paid on government securities/bonds in the overnight market. Im pretty sure thats what you call it!

3. This one confuses me, arbitrage is buying in one market and selling in another market to make a profit. Therefor to me, none of the answers satify that! but one has to... sooo. It's not B, not C and not D... So it must be A!

4. A market for pollution rights, this would be known as carbon credits in australia i assume, so this is companies who pollute pay for the right to pollute a certain amount. So its an incentive to not pollute as that costs them money and the funds created SHOULD be devoted to enviromental improvement, i assume they would. So D!

5. If at full employment we devoted more funding to captial goods, that is goods that can be used in the production process, we would assume labor productivity to rise as for every input of labor output should rise as they utilize the captial goods. (machinery etc) So d. At the same time present consumption should rise as the money being invested into captial will stream into the economy, But id go with D as i believe thats what the question really wants!

There you go!

Edit: You got a lot of differing answers... I'd go with there risk free answer not my answer as they are americans and know the terminology.

Answer 2

1. the answer is B. Because diversification is ONLY about risk aversion. Nothing to do with returns, only risk prevention.

2.C. Risk free rate, because a government bond is risk free (because government's don't go out of business).

3. The answer is B. Because arbitrage is about making money risk free, i.e. it's easy money. So think about it logically, if you sell at 8% and gain at 12%...then you are making a certain 4% each time. The answer is B, no doubt.

4.I don't know, I think the question is slightly vague and the answers aren't that related..because markets only provide competition. Government regulation and limits on pollution is what limits pollution. It's a poorly worded question.

5.The answer is D. most goods are either Capital or labour intensive. If you increase one, then it makes that return (per unit) weaker but the other (per unit) stronger.

I'm certain of those answers, apart from Q4 which is poorly worded.

Answer 3

I'll have a go:

1. A diversification reduces the risk of loss

2. C, risk free interest rate

3. A arbitrage refers to taking advantage of a market difference in price

4. D the cap and trade idea means the government sells rights to pollute. The rights then have a market value. So the sale allows funding for the government, and the market value for them means reducing pollution allows the owner of the rights to sell them.

5. C sounds like the only one that might be accurate. Capital goods are the opposite of consumer goods, so a shift to more capital goods would lower present consumption, increase future consumption, increase future labor productivity (so perhaps D as well, it doesn't have a time frame on it)...