RISK ANALYSIS A financial investor builds a portfolio that is worth an expected £35mil. The investor knows that his analysts can build a model to boost the potential return from the portfolio investment. The additional return has a Normal Distribution with mean £3mil and standard deviation £0.5mil. The investor wishes to sell his financial services at a price that guarantees his expected profit will be 5% of the total return from the portfolio. What should the price of his financial service be? Simulate (with a min of 200 repetitions) the average and the standard deviation of the profit the financial advisor realizes when setting the price for his services between 1% and 10% of the total expected return from the portfolio. Then discuss your findings.
RISK ANALYSIS A financial investor builds a portfolio that is worth an expected £35mil. The investor knows that his analysts can build a model to boost the potential return from the portfolio investment. The additional return has a Normal Distribution with mean £3mil and standard deviation £0.5mil. The investor wishes to sell his financial services at a price that guarantees his expected profit will be 5% of the total return from the portfolio. What should the price of his financial service be? Simulate (with a min of 200 repetitions) the average and the standard deviation of the profit the financial advisor realizes when setting the price for his services between 1% and 10% of the total expected return from the portfolio. Then discuss your findings.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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RISK ANALYSIS
A financial investor builds a portfolio that is worth an expected £35mil. The investor knows that his analysts can build a model to boost the potential return from the portfolio investment. The additional return has a Normal Distribution with mean £3mil and standard deviation £0.5mil. The investor wishes to sell his financial services at a
- What should the price of his financial service be?
- Simulate (with a min of 200 repetitions) the average and the standard deviation of the profit the financial advisor realizes when setting the price for his services between 1% and 10% of the total expected return from the portfolio. Then discuss your findings.
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